Tillman v Egon Zehnder Ltd – UK Supreme Court backs employers seeking to enforce restrictive covenants for senior executives
Mary-Caroline Tillman is a former investment banker and worked as a consultant at Egon Zehnder. She joined in 2004 and rose to joint global head of its Financial Services Practice Group by 2012. Egon Zehnder is a global management consulting firm and the world’s largest privately held executive recruitment search firm.
Mary-Caroline had an employment contract which contained post-termination restrictive covenants which is common for senior staff in the City of London, and indeed employees in many industries where employers wish to protect their business in the event of staff moving on. These covenants attempt to prevent an ex-employee from taking knowledge, staff and particularly clients/prospective clients to their new employer within a certain period of time after termination of the previous employment. In addition, they often provide that the employee cannot work directly for a competitor for a prescribed time.
The default legal position is that such restrictions are not lawful. They are seen as a restraint of trade (because they prevent ex-employees from easily moving to a new position), unless they seek to protect ‘legitimate business interests’. This means that unless the covenants are viewed as reasonable (i.e. the employer can prove that they will suffer actual financial loss if they are not upheld), they are often difficult to enforce. They also have to be reasonable in both time and space – in other words, they must not last for an excessive period of time, or cover an excessive area (it might be possible to prevent an ex-employee from taking a job with a competitor down the road, but not 100 miles away, for example). In addition, it was thought that the law was that if part of a restrictive covenant was unenforceable, then the whole clause would be ineffective.
Mary-Caroline left Egon Zehnder in 2017 and almost immediately took a job with a direct competitor. Egon Zehnder responded by seeking an injunction to delay the move. Mary-Caroline’s case was that the restrictions in her employment contract, which prevented her from engaging with, or being “interested” in, a competitor for a period of six months from the date of her move, were unreasonable. She sought to argue that even holding a minority shareholding in a company could be seen as being “interested in” the company and therefore this was too wide a restriction to be enforceable, meaning the whole clause (including the part about not working for a competitor) was unlawful and should be removed.
After several appeals, the case was heard by the Supreme Court. This is the first time that the highest Court in England and Wales has considered the law governing restrictive covenants. The case turned on whether part of a restrictive covenant in the employment contract constituted an unreasonable restraint of trade and further if this could be deleted from the covenant, leaving the rest intact. On 3 July 2019 the Supreme Court ruled in favour of Egon Zehnder determining that if the parts that had been argued as unreasonable were found to be so, then in any event these could be deleted and the remaining non-competition clause would still be valid. Employers will welcome the decision as it clarifies the grey area of whether post termination restrictions are reasonable, and the effect if parts of those restrictions are found to be unreasonable.
This case highlights the need for carefully drafted employment contracts and restrictive covenants, especially for senior staff, to protect business interests. If you are a business and have concerns about the effectiveness of your employment contracts and/or restrictive covenants, please contact Elaine O’Connor on 0207 940 4000 or at email@example.com.
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