Restrictive Covenants – the importance of precise drafting
Senior employees will often have a lot of knowledge about their employer’s business, its customers and suppliers. Indeed, this is often essential for them to perform their job properly. However, that same knowledge can become a threat when the employee leaves their employment and goes to work for a competitor or starts up a business in competition with their former employer. Employers therefore try to protect themselves by putting in place restrictions on what an employee can do after they leave their employment, and this is where things often go wrong.
Restrictive covenants (also known as post termination restrictions) will only be enforceable if they are necessary to protect and employer’s legitimate business interest and are reasonable. If they are wider than they need be they are likely to be unenforceable as being in restraint of trade. The scope of the restrictions may cover things such as trying to prevent the employee working for competitors or setting up their own business within a certain geographical area, preventing the employee soliciting or dealing with customers or suppliers, and preventing the employee recruiting former colleagues. These restrictions can all be enforceable if there is a legitimate reason for them, and they are properly drafted. Employers often complain that the courts are reluctant to enforce restrictive covenants, but this is usually only because they have been poorly drafted or the employer is unable to show that they are necessary.
An example of poor drafting was illustrated in the recent case of Tillman v Egon Zehnder Limited (2017). Egon Zehnder Limited (EZ) was an executive search company, largely head-hunting candidates who were in very senior roles. Ms Tillman had worked for EZ since 2004 and by 2017 was co-Global Head of the Financial Services Group which accounted for 22.5% of EZ’s billing. In January 2017 Ms Tillman gave EZ notice to terminate her employment, and a week later EZ terminated her contract with immediate effect and paid her in lieu of notice, as it was able to do under the terms of her contract. Ms Tillman subsequently told EZ that she was starting work for Russell Reynolds Associates who were one of EZ’s competitors. EZ then went to the High Court to seek an injunction to uphold the covenant and to prevent her working for their competitor for the 6 month duration of the restriction. The High Court granted the injunction, and Ms Tillman appealed to the Court of Appeal. She argued that the restrictive covenant was wider than was necessary for EZ to protect their legitimate business interest. The clause in question read:
“You shall not without the prior written consent of the Company directly or indirectly, either alone or jointly with or on behalf of any third party and whether as principal, manager, employee, contractor, consultant, agent or otherwise howsoever at any time within the period of six months from the Termination Date:
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 which were carried on at the Termination Date or during the period of twelve months prior to that date and with which you were materially concerned during such period."
Ms Tillman raised the argument that the wording “being interested” was too wide as it prevented her having even one share as an investment in a competitor who was a listed company. The Court of Appeal agreed. They pointed out that EZ could easily have included a provision allowing for minor shareholdings in listed companies, but did not do so. They also held that the word "interested" could not be deleted, as even if it were, the clause would still be too wide if read as a whole and therefore would still be unenforceable.
This case illustrates the need for great care in the drafting of restrictive covenants. If the interests which an employer is looking to protect are worth protecting, then it is always sensible to draft bespoke covenants to suit the particular employee. At Pure Employment Law we see restrictive covenants on a very regular basis, and in our experience a large number would be likely to be unenforceable. This is certainly an area where professional drafting should be considered a must.
If you would like to talk through a situation you are dealing with, or if you need advice on any aspect of employment law, please contact any member of the Pure Employment Law team (01243 836840 or email@example.com).
Please note that this update is not intended to be exhaustive or be a substitute for legal advice. The application of the law in this area will often depend upon the specific facts and you are advised to seek specific advice on any given scenario.