When can restrictive covenants be too restrictive?

Post termination restrictions, or restrictive covenants, are stipulations put into contracts that prevent former employees from engaging in certain activities after leaving a role. In order for these covenants to be enforceable, they do need to meet certain criteria and could be subject to what is known as the ‘blue pencil test’. Emma Kemp in our Employment Law team here reviews a recent case in which this test was used and provides employers with her insight as to what this could mean for employers in the future.

The case of Tillman v Egon Zehnder

The Supreme Court’s recent judgment in Tillman v Egon Zehnder clarified how employers should approach drafting post-termination restrictions in employment contracts.

In 2004, Ms Tillman joined Egon Zehnder, a recruitment firm. She worked her way up and in 2012 became the head of financial services. In January 2017, Ms Tillman left and shortly afterwards informed them of her intention to join another recruitment company in May 2017. She said she would comply with the restrictions preventing her from dealing with clients and poaching employees, but argued that the restriction preventing her from joining a competitor was too wide and unenforceable.

In April 2017, Egon Zehnder successfully obtained an injunction to prevent her moving to the competitor but this was overturned in the Court of Appeal in July 2017.

The restriction said that Ms Tillman should not for a period of six months after her employment:

“directly or indirectly engage or be concerned or interested in any business carried on in competition with any of the businesses of the Company or any Group Company”.

Ms Tillman argued that the phrase “or interested in” prevented her from holding any shares in a competitor and this was unreasonable.

What is the ‘blue pencil test’?

The case turned on whether the court could use the ‘blue pencil test’. The test allows a Court to strike out the offending words, but only if the remaining words make sense without any other changes and it does not majorly change the restriction. The Court cannot rewrite the clause.

The Supreme Court ruled that the blue pencil test could be used in this case. Had the phrase “interested in” remained, it would have prevented Ms Tillman from holding even one share in a competing company, which was too restrictive. However, the Supreme Court did add that while the blue pencil test can be used, it will not always be appropriate for the Court to use it.

What should employers consider regarding restrictive covenants?

For employers drafting post-termination clauses, the phrase “interested in” should now be used more cautiously, as a prohibition on holding any shareholding is unlikely to be upheld by the Courts. If companies want to prevent an ex-employee from holding a shareholding that would allow the ex-employee to have influence in the competing company, then the employer needs to state the certain percentage which is not allowed, for example, no more than 30% of the shareholding.

Some employers may now be encouraged to push for wider and heavier restrictions and rely on the Court to cut it down to what it considers reasonable, however, the Supreme Court stated companies should seek to get the wording of restrictions correct in the first place and not rely on the Court having to correct the drafting later on. It is important that any employer looking to use restrictive covenants in their employees’ employment contracts have them reviewed in order to ensure their enforceability.

If you require a review of any post-termination clauses or have further questions regarding their use, you can contact Emma or the Employment team on 023 8071 7717 or email employment@warnergoodman.co.uk. 

ENDS

This is for information purposes only and is no substitute for, and should not be interpreted as, legal advice.  All content was correct at the time of publishing and we cannot be held responsible for any changes that may invalidate this article.