UK: Restrictive Covenants – What Can An Ex-Employer Do To Stop You Working For A Competitor?

Last Updated: 25 January 2019
Article by Susan Hopcraft

The starting point is that no person can be restrained from earning a living. This is a long-standing principle of English law that the courts are generally careful to uphold.

The exception is for those who have signed a restrictive covenant when joining an employer, agreeing to post-employment restrictions that are strictly no wider than absolutely necessary to protect that employer's legitimate business interests. Employment contracts often contain these types of clause, particularly for more senior staff and in professional services. The question then becomes: are they enforceable?

What types of restriction might there be?

The usual types of restrictions are those that try to stop you from working for a competitor, working for clients that you dealt with at the previous employer, and/or from even trying to contact those clients you worked for. The restrictive covenant can include all three: a 'non-compete', a 'non-deal' and a 'non-solicit'. The employer tends to want all three but if, by doing that, the covenant becomes too wide the employer is liable to lose all protection, because the clause could be deemed unreasonably wide and therefore unenforceable.

The restriction can last for any length of time but, the shorter it is, the more likely a court will consider it to be reasonable. 12 months is at the dubious end of the scale, although for a very senior employee that might be upheld.

The justification is that the ex-employer will consider they have invested in developing the employee's skills and the client base and want to protect the return on that investment. The professional employee often considers the client base belongs to them, particularly when the clients were brought to the ex-employee with them, which is a real issue in the IFA world for example.

But if you are prevented from even working at a competitor, and your entire career has been in a specific role that means any new job is bound to be at a competitor, that sort of restriction can leave an employee without a salary at all for a period. The court has to balance the unfairness of that with the business's wish to protect its interests.

Non-compete clauses – a real example

A recent case considered the width of a non-compete clause. This was in the world of recruitment consultancy.

In January 2004 Ms Tillman joined EZ as a Consultant with an employment contract containing post-termination restrictive covenants. In 2006 she was promoted to Principal and in 2009 to Partner. In 2012 she was appointed as co-Global Head of the Financial Services Practice Group. In January 2017 she gave notice, was put on garden leave and then on 30th January 2017 her employment was terminated with immediate effect.

She was very senior at the point of her departure but was relatively valuable and senior at the point of arrival too, which is the time when the reasonableness of the covenant is assessed.

Ms Tillman wanted to move to another recruitment consultant but EZ wanted to enforce the six month non-compete covenant.

It was in fairly standard words and stated:

"13.2 You shall not without the prior written consent of the Company directly or indirectly, either alone or jointly with or on behalf of any third party and whether as principal, manager, employee, contractor, consultant, agent or otherwise howsoever at any time within the period of six months from the Termination Date:

13.2.3 directly or indirectly engage or be concerned or interested in any business carried on in competition with any of the businesses of the Company or any Group Company which were carried on at the Termination Date or during such period."

Ms Tillman argued that the clause was wider than reasonably required for the protection of EZ's interests, as it prevented her from engaging in activities anywhere in the world. She also argued that "interested in any business carried out in competition" included having a minor shareholding in a competitor, which was a restriction that was wider than reasonably necessary. She did not necessarily want to become a shareholder but that was the 'hook' that she used to try and have the covenant declared invalid.

First judgement

The first judge decided in May 2017 that the covenant did not prevent her from becoming a shareholder in a competitor. He relied on another clause in the contract that explicitly prevented shareholdings of more than 5% in competitors during employment. He used that to infer that, because the covenant did not explicitly refer to shareholdings, an 'interest' should not be read as including shareholdings. Had it been intended to prevent shareholdings, he reasoned, it would have dealt with that expressly.

The covenant was not, therefore, in unreasonable restraint of trade and was enforceable. The judge granted an injunction restraining Ms Tillman from working for the new company for the six month period in the covenant.

Appeal decision

The case went to appeal and the appeal decision was published in July 2017, at a point when the six months was almost up, although the outcome is no doubt important in relation to legal costs and damages payable by EZ for having wrongfully prevented Ms Tillman from working.

The appeal judges considered the more natural meaning of "interested in" and decided that clause 13.2.3 did prohibit shareholdings and was impermissibly wide and in restraint of trade. Since the offending words could not easily be severed from the rest of the covenant the whole clause was unenforceable.

Where are we?

That is not an end to it though because in February 2018 the Supreme Court agreed to hear an appeal, which should take place in January 2019.

It may seem strange that the clause, on the current outcome, is unenforceable just because of a limitation on holding shares, when an employee may not even intend to acquire shares. Public policy against restraint of trade is powerful though. In the words of Longmore LJ "the law which avoids contracts in unreasonable restraint of trade is based on the wide public policy of promoting competition and protecting employees from too readily abandoning the exercise of their right reasonably to compete after termination. In those circumstances the merits of individual cases must inevitably take second place."

Those employers who include non-compete covenants in their contracts with senior employees are likely to want to revisit their standard form once the Supreme Court has given its view.

Likewise any employee who has a covenant in similar words to the EZ one (and very many will) may want to hear what the Supreme Court says. If an employer proposes to try and amend it later this year, think very carefully before agreeing.

We have expertise in restrictive covenants and can advise on enforceability. We acted for the five ex-Affinity IFAs and successfully defended the claim for £10m brought against them in 2016 for alleged breach of 12 month covenants. The claim was withdrawn part way through trial and we recovered indemnity costs for our clients.

[Further reading: Tillman v Egon Zehnder Limited [2017] EWCA Civ 1054]

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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