Call us on 01242 224433

Insights

Employment

Restrictive covenants: Are you protected?

A restrictive covenant will be void for being in restraint of trade unless the employer has a legitimate interest to protect and the protection sought is no more than is reasonable having regard to the interests of the parties.

The reasonableness of a restrictive covenant will normally be determined by reference to the date the contract was entered into, rather than at the date when the employer is seeking to enforce it. Generally, it is either valid or invalid from the outset. If it is invalid it cannot later become valid due to changing circumstances.  Therefore if a covenant is void at the time it was entered into e.g. due to an employee holding a junior position, it will continue to be void even if the employee is promoted to a more senior position at the time the employer looks to enforce it.

However, when assessing the reasonableness of a restrictive covenant the parties’ expectations of future promotions should also be taken into account.  The recent High Court case of Egon Zehnder Ltd v Mary Caroline Tillman highlighted this.

In that case Mrs Tillman joined Egon Zehnder Ltd (EZ), an executive search company, in January 2004.  She had previously worked as an investment banker and had a good reputation in the financial sector.  Therefore she was recruited to work as a consultant in the Financial Services Group and signed an employment contract containing a 6 month non-compete clause. Mrs Tillman’s starting remuneration package was higher than that usually offered to a newly recruited consultant as, due to her previous experience, she was expected to rise through the ranks quickly. 

Mrs Tillman was promoted exceptionally quickly. By 2006 she was promoted to “principal”, in 2009 to “partner” and by 2012 she was Co-global Head of the Financial Services Practice Group. However, she did not sign a new version of her contract of employment with each promotion and was consequently still employed under the terms of her original 2004 contract.

In January 2017 Mrs Tillman resigned on notice.  One week later, on 30 January 2017, EZ terminated her employment with immediate effect and made a payment in lieu of notice in accordance with her contract.

Mrs Tillman then notified EZ that she wished to work for a New York based competitor from 1 May 2017.  EZ applied for an injunction on the basis that she would be in breach of the six month non-compete clause contained in her employment contract and therefore should be prevented from joining a competitor until 30 July.

However, Mrs Tillman argued that 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 was necessary to protect EZ’s legitimate business interests, particularly in light of her original duties as a consultant.

The High Court accepted that EZ had legitimate business interests meriting protection and concluded that the 6 month non-compete clause was justified. They agreed it was correct to determine the validity of the restrictive covenants by reference to Mrs Tillman’s initial status as a consultant.  On this basis alone the non-compete clause would have been too widely drawn for a consultant role and therefore would not have been enforceable.

However, the court found that it is also legitimate to take into account an employee’s future prospects and an employer may have been preparing an individual for promotion and therefore that person may have had greater access to clients and confidential information than would otherwise have been expected.   In this case, in 2004 it was within the contemplation of both parties that Mrs Tillman would be rapidly promoted and therefore she had more client engagement and involvement in strategic matters than was usual.

What does this mean for you or your business?

The above case is a useful reminder of the existing rules where an employee has not entered into new restrictive covenants following a significant promotion.  

This case will not help employers looking to enforce historic covenants entered into when the parties had no contemplation of any future promotion.  However, it would be helpful for employers who are trying to enforce restrictive covenants if they can clearly evidence that they recruited an individual with a plan towards promotion to a more senior role at a later date.  In this scenario it may be possible to justify a covenant that might otherwise have been considered unreasonably wide at the outset.

What do you need to be doing now?

Where employees are recruited with a view to rapid promotion, record the parties’ expectations in terms of a timeline for promotion and what the initial role will involve over and above standard expectations.

Ensure that restrictive covenants are appropriate for the role into which an employee is recruited.

Ask an employee to enter into new restrictive covenants upon a promotion if the existing restrictions would no longer be sufficient.

 

These notes have been prepared for the purpose of an article only. They should not be regarded as a substitute for taking legal advice.

Get in touch