Supreme Court to decide validity of thousands of employment contracts

22 Jan 2019 By Lauren Brown

Landmark case should remind employers about importance of restrictive covenant wording, say experts

The Supreme Court has begun the process of deciding a case that could see thousands of employment contracts voided over their use of restrictive covenants, also known as non-compete clauses.

Experts have warned the landmark case should serve to remind employers of how sensitive the wording of these clauses is.

The Supreme Court is reviewing a previous Court of Appeal judgment that a six-month non-compete clause was unenforceable because it was too broad.

In Tillman v Egon Zehnder Ltd (2017) the Court of Appeal held that the clause, which prevented employees from being “concerned or interested in any business carried on in competition" after termination, was unreasonable because the time frame was too wide and it would bar former employees from being a shareholder in a competing business.

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Egon Zehnder, an executive recruitment and global management consultancy, appealed the decision to the Supreme Court, where it is now being reconsidered.

Non-compete clauses are commonplace in the contracts of senior executives across the financial and professional services sectors, as well as in partnership agreements, and if upheld, contracts that include such a provision may have to be rewritten.

Andrew Willis, head of legal at HR-inform said the case had ramifications that reached beyond the City. 

Willis said the case should remind employers across all industries about the sensitivity of the wording included in restrictive covenants. “Terms included in documents which seek to restrict an ex-employee’s actions after termination of employment will only be enforceable when they are reasonable,” he said.

“This is determined by the specific facts of the case, but including a term which is impermissibly wide and offering no flexibility to the employee will, as we have seen here, affect the ability to enforce them.” 

Willis added when constructing restrictive covenants, employers should be clear on what they want to restrict and avoid general terminology. 

“Terms which are too broad will be interpreted widely and, if deemed unreasonable, will mean that the ex-employee is not bound by them. Employers will therefore be at risk of failing to protect their interests, which is the point of a restrictive covenant in the first place.”

Ivor Adair, partner at Fox & Partners, warned that affected employees could refuse to sign a new contract without additional benefits. “This important case is the first of its kind in more than a century and puts the contracts of senior executives under the spotlight,” he said.

“Employers may face demands for additional pay or benefits from employees before any new contracts are signed, such as shorter notice periods, one-off bonus awards or longer holidays.”

Adair added the case could also open up the possibility that employers may be forced to fire and rehire employees on new terms if they cannot get them to sign revised contracts. However, this could leave employers exposed to unfair dismissal claims and trigger ‘good leaver’ status for employees.

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