Restrictive Covenants in the Spotlight Following Supreme Court Ruling
A recent case in the Supreme Court has brought the use and content of restrictive covenants by employers into the spotlight.
The case, which concerned recruitment firm Egon Zehnder and former employee Mary-Caroline Tillman, found that restrictive covenants preventing an employee from being “concerned or interested” in a competitor for six months after they leave were not too wide to be enforceable.
The clause of the covenant in Ms Tilman’s contract stated that she could not “directly or indirectly engage or be concerned or interested in any business carried on in competition with any of the businesses of [Egon Zehnder]” for six months after leaving the business.
In reaching this ruling, the Supreme Court overturned the previous decision of the Court of Appeal, which had determined that the words “interested in” made the clause an unreasonable restraint of trade. The Supreme Court found that removing these two words from the clause did not result in any major change in the overall effect of the restriction, and the clause could therefore be upheld.
Restrictive covenants have long been a ‘grey area’ for employers and this recent ruling goes some way to clarify matters. However, the ruling certainly doesn’t give free reign for employers to include whatever terms they like.
When putting restrictive covenants in place, employers should be mindful of the following;
- Companies can include their own tailored covenants within contracts of employment. It is important however to ensure that the restrictions are relevant to the specific business and the role of that particular employee;
- If a dispute regarding a restrictive covenant should arise, the court will consider whether the drafting of the covenant is ‘specific’ and ‘reasonable’. If the court is not satisfied that the covenants restrictions are not reasonable or indeed specific, then the covenant may be found to be unenforceable against the employee;
- The majority of the time, restrictive covenants will be introduced as part of an employment contract before an individual commences work, however it is possible to introduce such restrictions at a later date. Employers should be mindful however that the court will look at whether any consideration was given by the employer in return for the employee agreeing to be bound by the restrictive covenants, such as a promotion. Should an employer need to call upon a restrictive covenant in the future, they will need clear evidence that the employee(s) have agreed to it.
- Although it may be tempting to include restrictive covenants across all employment contracts, employers should note that this ‘carte blanche’ approach would likely be viewed as inappropriate by the court. Restrictive covenants are only usually appropriate for senior employees, or those who have access to confidential information and/or hold a high-profile role within the company.
For further help or advice in relation to restrictive covenants, whether you are an employer or an employee, please contact Suzzanne Gardener on 01457 761 320 or email Suzzanne Gardener at [email protected].