Three U.K. Court decisions recently handed down have clarified the law in relation to post-employment non-compete covenants, the "public interest" test in relation to whistleblowing claims and whether voluntary overtime should be included in the calculation of holiday pay. We have explained below the implications of these decisions and their relevance to employers.

Case 1: Non-Compete Not Upheld Due to Drafting Flaw

In Tillman v Egon Zehnder Ltd [2017] EWCA Civ 1054, the Court of Appeal refused to enforce an employee's six-month post-employment non-compete covenant because it did not expressly exclude minority shareholding(s) in listed companies that might be held by the departing employee for investment purposes. Employers in the U.K. should check to see if their employment contracts contain any post-termination non-compete covenants which may not be enforceable and for this reason and, if so, consider agreeing new covenants with their employees.

Background

It is common in the U.K. to ask key employees to agree to restrictions which prevent them from competing with their employer for a period of time (typically up to 12 months) following termination of employment. However, the U.K. courts take a strict approach to enforcement of such covenants and they will only enforce a covenant if it is no wider than reasonably necessary to protect an employer's business interests. This means that care has to be given to drafting a non-compete so that it only prevents an employee from competitive activities that could harm the employer.

Ms. Tillman was employed by Egon Zehnder Ltd (Egon) as a headhunter. On January 23, 2017, she gave notice of her resignation and then Egon terminated her employment with immediate effect by making a payment in lieu of notice in accordance with her contract of employment. Ms. Tillman informed Egon that she intended to start work for a competitor of Egon on May 1, 2017. Egon sought an injunction on the basis that this would breach Ms. Tillman's noncompete covenant which lasted for six months following termination and expired on July 30, 2017.

The High Court granted Egon's application for an injunction and upheld the non-compete covenant to prevent Ms. Tillman working for the competitor until July 30, 2017. However, Ms. Tillman appealed and the Court of Appeal (CoA) set aside the injunction. The non-compete covenant stated that Ms. Tillman would not be "concerned or interested in" a competing business during the six months after her employment ceased and the CoA held that such a restriction prevented Ms. Tillman from holding a minor shareholding in a competing (albeit publicly listed) business held for investment purposes. The CoA held that the covenant was, therefore, too wide to be enforceable, even though the employee had no such minority interests nor an intention to acquire any.

Further, the CoA refused to sever (i.e., strike out) the offending wording (known as "blue pencilling") in order that the remaining wording would be enforceable, stating that its ability to sever a covenant is limited to striking through a whole distinct covenant, not deleting the occasional word within a covenant so that the remaining words would be an enforceable restriction.

Key Implications

This judgment is not welcome news for employers as any post-employment non-compete provision is likely to be void if it prohibits an employee from holding a minority shareholding in a listed company, whether or not the employee has any intention of holding such an interest, and the judgment confirms that a court's power to "blue pencil" any defective covenants (so as to cure any drafting flaws) is limited.

Practical Tips for Employers

The practical tips for employers are as follows:

  • Employers should consider auditing the postemployment non-compete provisions of key employees to check whether the employee can hold a minority interest (typically 1% or 3%) for investment purposes in publicly listed companies. If not, this covenant may not be enforceable and it is recommended that employers should seek specialist legal advice regarding potential options to address this issue.
  • Any non-compete covenants agreed with employees in future should permit the employee to hold such a minority interest.
  • Wherever possible, each individual covenant (including any non-solicitation and non-dealing covenants) should be split into separate subclauses to increase the prospect that a court might be prepared to sever any impermissibly wide drafting but leave the other covenants intact.
  • Covenants should be accompanied by a blue pencil clause (i.e., a clause stating that each of the restrictions are intended to be separate and severable and, if any of the restrictions shall be held to be void but would be valid if part of their wording were deleted, such restriction shall apply with such deletion as may be necessary to make it valid or effective).

Case 2: When is a Whistleblower Acting in the Public Interest?

In Chesterton Global Ltd (t/a Chestertons) and another v Nurmohamed and another [2017] EWCA Civ 979, the Court of Appeal gave guidance for the first time on the factors which will determine whether an employee's disclosure about wrongdoing was made in the public interest and, therefore, qualify the employee for protection from suffering a detriment or being dismissed as a consequence of his/her disclosure (i.e., whistleblower protection).

Background

In the U.K., whistleblowers have been protected from the actions of their employer for almost two decades. However, in 2002 the Employment Appeal Tribunal (EAT) decided in Parkins v Sodexho Ltd [2002] IRLR 109 that a complaint about a breach of an employee's own contract could confer whistleblower protection on the employee. The decision in Sodexho was criticised by some on the basis that whistleblower legislation should not apply where the employee's allegation about the employer's wrongdoing relates only to the employee and his contract of employment, as the general public's interests are not affected by that wrongdoing.

In an effort to reverse the Sodexho decision, the U.K. Government amended the whistleblower legislation in June 2013, by requiring a disclosure to be (in the reasonable opinion of the employee) in the public interest, in order for it to be a qualifying disclosure which confers whistleblower protection on the employee making the disclosure. Accordingly, the relevant legislation now has the effect that employees will only be protected from detriment or dismissal if they have made a disclosure about certain types of wrongdoing in the reasonable belief that the disclosure is in the public interest.

However, not too long after the U.K. Government inserted the public interest test into the legislation, the EAT heard an appeal in the Chesterton litigation. Mr. Nurmohamed had made a disclosure to his managers, essentially accusing Chestertons of intentionally misreporting financial performance in order to reduce the amount of commission awarded to him and approximately 100 other employees. The EAT decided that this was a disclosure which was made in the reasonable belief that it was in the public interest, even though the disclosure related to only around 100 employees of Chestertons. Some commentators stated that the U.K. Government's amendments to the whistleblower legislation had been undermined by the EAT's decision as, once again, a disclosure about a private dispute between an employee and the employer could be a qualifying disclosure resulting in whistleblower protection for the employee.

When the case came before the CoA, it concluded that Mr. Nurmohamed had reasonably believed that his disclosure was in the public interest when he complained to his managers about alleged financial misreporting in interim financial accounts. The CoA was not persuaded by legal arguments that a disclosure could not qualify for whistleblower protection just because the content of the disclosure related to the interests of a small number of (or even one) employee.

In determining the public interest test, the CoA decided that there are no set rules and the quantity of people affected by the alleged wrongdoing is not determinative. Instead, it endorsed the submissions of Mr. Nurmohamed's barrister, who had suggested to the CoA that the following factors should be taken into account:

  1. The number of people affected by the issue.
  2. The nature and extent of the interests affected.
  3. The nature of the alleged wrongdoing (particularly if it is deliberate).
  4. The identity of the alleged wrongdoer.

Implications for Employers

The CoA also confirmed in its judgment that the public interest test involves subjective and objective elements. The question to ask is whether an employee (subjectively) thought that the disclosure he/she made was in the public interest and whether it was (objectively) reasonable for him/her to have held that belief. It does not matter whether the employee's belief in the subject matter of the disclosure is wrong (though that might suggest it was not reasonable of him/her, to think the disclosure was in the public interest).

Unfortunately for employers, this case does, however, make it easier for employees to allege they are a whistleblower and protected from detriment and dismissal, when their complaint of wrongdoing relates to a private dispute with the employer, and not wrongdoing which may affect the interests of the wider public.

Practical Tips for Employers

An employer should have a whistleblowing policy and robust procedures in place to address employees' complaints about wrongdoing in the workplace. If an employer suspects, having investigated a complaint, that the complaint is without merit, made for an ulterior motive or relates to a private dispute between

the employee and the employer, it is important for the employer to carefully document all of the surrounding factors which relate to the dispute. Doing so will help to demonstrate, in any subsequent litigation that, even if the employee subjectively thought their complaint was made in the public interest, objectively it was not reasonable for the employee to do so, and therefore the complaint is not a qualifying disclosure which attracts whistleblower protection.

Case 3: Holiday Pay Should Include Voluntary Overtime

In Dudley Metropolitan Borough Council v Willetts and others UKEAT/0334/1, the EAT confirmed that voluntary overtime (and certain other elements of variable pay) should be included in the calculation of an employee's four weeks of annual leave guaranteed by the European Working Time Directive (EU Holidays). This decision clarifies some of the doubt surrounding the calculation of holiday pay liabilities, although grey areas remain.

Background

In our Employer Update dated November 2014, we explained that the EAT had given its long awaited judgment in Bear Scotland Ltd v Fulton and others UKEATS/0047/1, the effect of which was that U.K. employers should take into account payments of nonguaranteed overtime when calculating pay for employees' EU Holidays (EU Holiday Pay). Whilst Fulton followed the precedent set by the Court of Justice of the European Court (CJEU) in the earlier landmark case of Lock v British Gas, the practice of most employers in the U.K. until that time had been to calculate all holiday pay with reference to basic pay only, and resulted in serious financial implications for many employers and thousands of employment tribunal claims across the U.K.

The decision in Dudley was the first time the EAT had considered whether voluntary overtime where an employee has no obligation to work or be offered overtime should be included in EU Holiday Pay.

In Dudley, employees presented employment tribunal claims alleging an underpayment of their EU Holiday Pay. Specifically, they alleged that their EU Holiday Pay should include pay relating to: (i) the overtime they worked on a voluntary basis; (ii) standby allowance for being on the on-call rota; (iii) call-out payments which were due if they were required to work whilst on the on-call rota; and (iv) mileage allowances for work travel. The employees could not be compelled by Dudley council to work overtime or be on the on-call rota; the employees did so on a voluntary basis.

The EAT decided that that voluntary overtime pay, oncall allowances and on-call payments should count towards EU Holiday Pay, provided these payments were part of an employee's "normal pay". Interestingly, the EAT commented that overtime pay would be part of normal pay even if it was paid only one week per month or one week in five. Further, the EAT held that: (i) it did not matter that the employees were not contractually required to do overtime or oncall work; and (ii) any reduction in remuneration due to taking holidays infers there is a deterrent effect on the employee taking holidays, and it is not necessary for the employees to show that they were actually deterred from taking their holidays.

For separate reasons, the taxable portion of the mileage allowances were also found to be part of the employees' normal pay and, therefore, should be reflected in their EU Holiday Pay.

Implications for Employers

This judgment is not unexpected as the tribunals and courts have been fairly consistent in finding that different types of variable pay should be included in EU Holiday Pay, but now there is little doubt that voluntary overtime pay should be included too (provided it is part of an employee's normal pay). Also, it appears reasonably clear that employers cannot argue that only overtime/allowance payments

which are set out in an employment contract should be included in EU Holiday Pay. However, there are still no definitive criteria for determining whether a payment is paid regularly enough to be considered part of an employee's normal pay. The judgment provides some help in that variable pay which is received one week per month or one week in five appears likely to be part of normal pay but it is a fact specific issue that has to be determined on a case by case basis.

Practical Tips for Employers and Purchasers of Businesses

Many employers do not include any or certain aspects of variable pay in the calculation of employees' EU Holiday Pay, for a variety of reasons, but often because they have been waiting to see what the outcome of the case law would be. This means that many employees in the U.K. may continue to have potential liabilities relating to historic, underpaid holiday pay. Whilst this judgment may yet be appealed, it appears unlikely that the decision will be overturned by a higher court. Any employers who are considering changing their practice in relation to holiday pay should consider taking legal advice as this is a complex area of the law, and there remain uncertainties, not least what impact Brexit might have on holiday pay laws when, as appears to be the case, the U.K. will exit from the jurisdiction of the CJEU.

Holiday pay liabilities will continue to be a commercial issue which employers (and also purchasers acquiring U.K. businesses) will have to consider. Purchasers will need to continue to factor these potential liabilities into their purchase price calculations and/or require indemnity protection from sellers.