Employment Restrictions Operating After the End of the Contract

August 03, 2017

Employment

Employment Restrictions Operating After the End of the Contract

Egon Zehnder Ltd v Tillman [2017] EWCA Civ 1054 (21 July 2017)

Many employment contracts for more senior people contain covenants which seek to prevent the employee from various activities following his or her departure.  Typically, such restraints will provide a period of time during which the ex-employee cannot poach staff, seek to gain business from the old employer’s clients, or even prevent the ex-employee from being engaged in the same or similar competing business.

The general rule is that covenants in restraint of competition are void; this is a matter of public policy.  Competition is seen as good and restraints on workers are seen as bad.  However, post termination restraint clauses will be upheld provided that they go no further than is reasonably necessary to protect the legitimate business interests of the employer.  Broadly this means that the employer will need to show that it has invested time and money in building up goodwill and it would be unfair to allow an ex-employee to benefit from that investment to the detriment of the old employer until at least some reasonable time has passed.

There is a wide availability of standard precedents.  Because these are the product of experience as to what a court will normally accept as enforceable, they tend to be reliable.  Nowadays the usual areas of dispute is as to whether the restraint time period is the right length or too long; if too long, the covenant will fail. 

There is a danger, when drafting, in trying to cut down on these clauses; there is a natural antipathy towards what appears to be verbosity.  One provision, which will be found in standard precedents (good ones) is a statement to the effect that nothing in the restraints will prevent an employee from holding shareholdings in a competitor provided that that shareholding does not exceed, say, 5% of the issued share capital.

In a recent case, the restraint against an employee provided that she should not, for a period of 6 months, be concerned or interested in any business which was carried out in competition with the ex-employer.  It was silent on the matter of investments.

The employee, who was transferring to a competitor, argued that the restraint was unenforceable because the words “interested in” encompassed her holding minority shares in a competitor for purely investment purposes.  Holding such shares could not, said the Court of Appeal, damage the interests of the employer and, absent the usual wording about the restraint not applying to such shareholdings, the whole covenant failed and was unenforceable.  The fact that the employee held no such shares and had no intention of holding such shares was irrelevant.

The lessons flowing from this case (which also dealt at length with construction of contracts (see previous blog)) are:

Check your employee’s contracts; the one in question was drafted in 2003.  Had it been subject to review, a solicitor would surely have pointed out the deficiency.

The majority of reported decisions in this area of law relate to high flying employees working in cash rich industries.  The reason for this is simple.  The average employer simply cannot afford to run expensive and risky litigation.  In this particular case, the Court of Appeal decision came just days before the expiry of the 6 month limitation period.  So what the case in reality turned out to be about was who should pay the costs.

If the average employer is really concerned about protecting valuable business interests, it should seriously consider including a gardening leave provision in its employment contracts.  Advice on this can be given.  The main merit of gardening leave is that the employer will have the opportunity of rebuilding relationships with clients and customers whilst the employee is effectively out of the market.  Hopefully, by the time the employee can leave and start to compete, the main threat will have passed.

If you need help or advice with any aspect of employment law - either as an employer or an employee - please call Julian Freeland on 01869 252244

posted by Julian Freeland | August 03 2017