The Supreme Court in the recent case of Tillman v Egon Zehnder Ltd  UKSC 32 has overturned the decision of the Court of Appeal, applying the principle of severance to a post-employment restrictive covenant.
Restrictive covenants seek to enforce restrictions upon a specific party throughout and for a period following a transaction. They have become prevalent devices in business acquisitions and employment contracts. Used to protect key assets such as goodwill and trade secrets. One such example is restricting a person who is selling a business, from setting up in competition for a period after the sale.
As long-established by case law, any restraint of trade which restricts the ability of an individual to work post-termination will be void unless it goes no further than is necessary to protect a legitimate business interest.
Principle of Severance
Although the courts will narrowly interpret the wording of a restrictive covenant, the principle of severance has given the courts the power to sever particular offending words in a clause. Leaving the remainder in force. The criteria for applying severance has now been clarified in this recent Supreme Court case.
The restriction came in the form of a non-compete clause in Ms. Tillman’s employment contract. Non-compete clauses usually last for the duration of employment and for a number of months following termination. Ms. Tillman was a key figure in the company and was promoted a number of times without a new contract.
Ms. Tillman handed in her notice and the company paid her in lieu of notice to terminate her contract, at which point she was subject to a broad 6 months non-compete restriction. However, when she notified the company that she intended to start work for a competitor before the period expired, the company filed an injunction to which Ms. Tillman appealed.
The restriction stated that Ms. Tillman may not “…engage or be concerned or interested in any business carried on in competition”. The Supreme Court agreed with the Court of Appeal that the restrictive covenant was impermissibly wide as the words “or interested” prevented Ms. Tillman from acquiring any shareholding post-termination, no matter how small. It is usual for minor shareholdings held as an investment to be excluded from the restriction.
However, the Supreme Court disagreed with the Court of Appeal that the offending words could not be severed to leave the remaining reasonable parts of the clause. The correct set of rules to apply were, in fact, three criteria:
- Whether the colloquially known ‘blue pencil test’ could remove the words “or interested” from the covenant, without the need to add or modify the wording of the remainder;
- Whether the remaining terms were supported by adequate consideration; and
- That the removal of the words “or interested” must not generate any major change in the overall effect of all the post-employment restraints.
Although this case clarifies the test for severance, employers should be aware of the need for restrictive covenants to be tailored for their employees to maximise their chances of enforceability. Severance may not always be enforced by the courts and relying on it should be considered a very last resort to avoid post-termination clauses resulting in a dispute.
This case also highlights the importance of revisiting existing restrictive covenants after certain events, such as promotions or a significant lapse of time to ensure they remain relevant and appropriate.
BHW can help tailor restrictive covenants considering the company’s business and individual employee’s responsibilities to take account of what the company considers important in an attempt to show legitimate reasons for each restriction. For further information contact Corporate Solicitor, Robert Flannagan, on 0116 402 7245 or email firstname.lastname@example.org.