“Restrictive covenants” are common in employment contracts, whereby the employee agrees that following any termination of employment they will refrain from doing one or more of the following:
Divulging confidential information to a third party;
Working for a competitor of the employer;
Poaching employees of the employer;
Soliciting or dealing with customers of their employer.
However, just because the term is in the contract, does not mean it is valid. The general rule is that all contractual restraints on a former employee’s freedom to work are void and unenforceable unless they can be shown to go no further than is reasonably necessary to protect the employer’s legitimate business interest.
There are no rigid guidelines to determine whether a covenant is reasonable with cases judged individually, considering the individual’s seniority (when the covenant was entered into), the employer’s markets and the extent of the restriction. The onus is on the employer to show the restriction is reasonable.
The case law goes back over 100 years, and historically took a more restrictive, employee-friendly approach to the interpretation of restrictive covenants – making it difficult for employers to rely on restrictive covenants.
However, this year in the case of Tillman v Egon Zehnder Ltd , the Supreme Court reconsidered the law, handing down a landmark judgment clarifying the circumstances in which the Court will intervene to “blue pencil” (“delete”) parts of clauses that are excessive and enforce the remainder.
The “blue pencil” test remains limited in impact (a court will not rewrite a clause to make it enforceable if it’s too broad, nor will it interpret a wide restriction as having implied limitations). The judgment also suggests that employers who go to court asking them to blue pencil an imperfect clause may be penalised in costs, so the price of enforcing the remainder of a badly drafted clause may be too high.
Ultimately, ensuring restrictive covenants are carefully considered, well drafted and kept under review will give employers the best prospects of protecting their business.
For further information, please contact Laura Clark on 01522 515945 or visit wilkinchapman.co.uk
