How to make non-compete clauses enforceable
We regularly advise employers and employees on the enforceability of restrictive covenants following the end of the employment relationship.
The Supreme Court in the case of Tillman v Egon Zehnder has confirmed the principle that it is possible for part of a restrictive covenant clause, in this case the word “interested in”, to be removed without damaging the rest of the clause and therefore remain binding on the departing employee.
Ms Tillman worked as Joint Global Head in the financial services department at Egon Zehnder, an executive search and recruitment company. She was initially recruited as a consultant in 2006 and largely employed on the same terms, despite becoming an employee and promoted.
A clause in her contract required Ms Tillman for 6 months after her termination by Egon Zehnder not to “directly or indirectly engage or be concerned or interested in any business carried on in competition with any of the businesses of [Egon Zehnder] within a twelve-month period prior to the termination date and with which [she was] materially concerned during such period.”
Ms Tillman’s employment ceased on 30 January 2017. She agreed that the clause meant she would not be able to be employed by a competing business but took issue with the fact that the words “interested in” prevented her from even holding a minor shareholding in a competing business. She informed her former employer that she would not be complying with this particular element of the clause (although she agreed to comply with all other elements) because it was unreasonable and therefore legally invalid.
The Lower Courts:
Egon Zehnder took out an injunction to restrain Ms Tillman from taking up her new role. The High Court granted the injunction, deciding that “interested in” did not preclude a minor shareholding but did not make any finding on whether this part could be removed from the clause, leaving the other elements which were agreed to. The Court of Appeal overturned the injunction and held that “interested in” would preclude a minor shareholding and the offending part could not be removed. The whole clause was rendered void.
The Supreme Court:
The Supreme Court considered whether it was possible to amend an unenforceable restrictive covenant clause to make it enforceable. The Supreme Court confirmed it could, provided:
- The unenforceable part must be able to be removed without changing or adding to the remaining clause; and
- that the removal of word (s) would not change the overall effect of all the restrictive covenant clauses in the contract.
Applying the criteria, the Supreme Court held that the word “interested in” could be removed so she was not bound by this, and the rest of the restrictions in the clause still applied.
This is very welcome news to employers as it means that if a restrictive covenant in a contract of employment is too restrictive to be legally valid, then it does not automatically mean that all of the restrictive covenants in the contract are void. The onus is on the employer to establish that the criteria required for severance are met. One way of avoiding this is to ensure that all parts of restrictive covenants are reasonable and appropriate bearing in mind the employee’s role and level of seniority. It was striking in this case that Ms Tillman was bound by a clause she had agreed to 11 years prior, and related to her role as a consultant whereas she left as Joint Global Head in financial services.