Restrictive covenants – Employers: Are you protected?

The importance of taking painstaking care over the drafting of employment contracts - particularly when it comes to non-compete restrictive covenants - has been highlighted by a recent Court of Appeal decision.

Mary Caroline Tillman won a legal battle against her former employer, Egon Zehnder Ltd (EZ), over a non-compete clause invoked after she resigned and later announced she was joining the New York office of rival company, Russell Reynolds Associates.

How far is reasonable?

It has long been known that restrictive covenants in employment contracts are enforceable only as long as an employer can prove they go no further than reasonably necessary to protect its legitimate business interests such as client and customer connections, trade secrets, confidential information and the stability of its workforce.

Ms Tillman argued that the non-compete clause in her contract was void as it included an "unreasonable" ban on becoming a shareholder in a rival firm even though she did not intend to buy stock in her new employer.

The decision is likely to have important implications in future cases concerning the enforcement of post-termination restrictions.

Background to the case

Ms Tillman joined Egon Zehnder, an executive search company, in January 2004, as a consultant in the Financial Services Group and signed an employment contract containing a six month non-compete clause.

With an established reputation in the financial sector and experience as an investment banker, she was expected to rise rapidly through the ranks and this was indeed what happened with a speedy series of promotions which saw her appointed as the Co-global Head of the Financial Services Practice Group by 2012.

Crucially though, she did not sign a new version of her contract with each promotion and was consequently still employed under the terms of her 2004 contract.

What happened next?

• In January 2017, Ms Tillman resigned on notice;
• One week later, on January 30, EZ terminated her employment with immediate effect and made a payment in lieu of notice in accordance with her contract;
• Ms Tillman told EZ she wanted to work for a New York competitor from May 1;
• EZ applied for an injunction on the basis that she was in breach of the six month non-compete clause in her employment contract preventing her from joining a competitor until July 30;

In the first instance, EZ succeeding in winning an injunction in the High Court enforcing the six-month non-compete clause.

But the Court of Appeal later overturned this after Ms Tillman successfully argued the non-compete clause was unenforceable when the parties entered into it at the start of her employment, alleging that the restriction was wider than necessary to protect EZ's business interests, particularly in light of her original duties as a consultant.

What does this mean for employers?

To avoid dispute, employers should tailor their restrictive covenants with an appropriate scope to suit the role into which an employee is hired and watch out for unnecessarily wide wording.

In addition, where employees are expected to be promoted quickly, it is advisable to record the parties' expectations for promotion, including anticipated timescales.

It is important to ensure that restrictive covenants are appropriate for the role into which an employee is recruited and to ask an employee to enter into new restrictive covenants on promotion if the existing restrictions would no longer be sufficient.

The key message is that a restrictive covenant must, at the time the contract is entered into, be suited to the employee's role and to the employer's protectable interests. It also seems that evidence of an expectation of likely promotion - and of how that expectation manifested itself - may well help an employer's enforceability arguments. But it's important to keep these clauses under review and to update them where necessary as people progress through the business.

For more information about this area of the law, please contact Wards Solicitors' business employment team.