The purpose of restrictive covenants is well known. Employment contracts are often (or at least should be) carefully drafted to ensure that they protect the legitimate business interests of an employer. Should a wayward employee ignore the restrictions on what they cannot do during and after employment, employers may be able to enforce the employment contract by way of interim injunctions. However, the recent case of Tillman v Egon Zehnder Ltd seems to have significantly weakened an employer’s ability to enforce covenants.
This article explains injunctions, considers the current law and suggests the steps an employer can take to strengthen its position.
Interim injunctions – What are they?
It is advisable to try to resolve any contractual disputes with former employees in pre-action correspondence. At this point, an employer can request that the former employee enters into acceptable undertakings not to breach the employment contract. In fact, any failure of the former employee to do so may later be useful evidence in subsequent injunctive proceedings.
However, when pre-action efforts fail, an employer can ask the Court to determine the matter by way of an interim injunction. This will be to: (a) protect confidential information of the employer; and / or (b) restrain a wayward former employee from joining a competitor or soliciting former team members.
At the interim injunction stage the matters of fact of the case will not be determined by the Court, but will instead be assessed on the basis of whether there is a serious issue to be tried. This is usually a fairly low hurdle for any employer to overcome. However, employers should be aware that the Court will also look at the wording of the employment contract in order to assess whether or not it is enforceable. The Court will determine whether the restrictions in the employment contract go no further than reasonably necessary to protect the legitimate business interest of the employer.
In the event that the Court is persuaded that the relevant clauses in the employment contract are enforceable, the Court may order an injunction. This will expressly prevent the employee from acting in breach, in which case the employers’ business interests will remain protected, at least for a restricted period.
The impact of the Egon Zehnder case
The recent Court of Appeal decision in the case of Tillman v Egon Zehnder Ltd [2017] (the facts of which were set out in our December 2017 article “Restrictive Covenants and Unlawful Restraint of Trade” available here [INSERT HYPERLINK]) has dramatically changed the landscape as we knew it.
The case set out two principles which will require employers to seriously re-think the wording of their employment contracts:
1. A prohibition on shareholding in a restrictive covenant will make a restraint impermissibly wide and unenforceable. Had the covenant permitted the former employee to hold a 5% shareholding in a competitor, it may have been enforceable.
2. Parts of a single covenant cannot be severed in order to save the covenant, but severance can only take place when there are distinct covenants.
This is a complete departure from previous practice as it has been accepted for a long time that the Court can “blue pencil” (i.e. strike out) parts of a clause that would otherwise render that clause unenforceable. This concept has now been blown out of the water by Egon Zehnder. There is now a real risk that where the Court considers part of a covenant unenforceable, it will render the whole of it unenforceable. This would make it impossible for the employer to protect its legitimate business interest by way of an injunction.
What can employers do to better protect themselves?
To improve the chances of stopping rogue employees from competing / taking confidential information in breach of contract, employers are advised to review their existing employment contracts with the following in mind.
– Employment contracts should not prevent an employee from taking up a shareholding in a competing business.
– As far as is possible, restrictions should be drafted in a way that makes them expressly distinct from each other. This should make it more likely that a Court agrees to sever a clause held to be unenforceable but still leave other useful clauses intact.
– Confidentiality clauses (i.e. clauses expressly forbidding an employee from disclosing “confidential” information either during or after termination of employment) should not be vague. Ideally, therefore, they should not include expressions such as “including but not limited to” (such wording having recently been held to be imprecise and therefore fatal to a confidentiality clause in the case of Capita plc and another v Darch and others [2017]).
What next?
We have seen an increase in the number of senior employees moving jobs and challenging the enforceability of their post-termination restrictions. Well-advised employees are aware that this decision has made it more difficult for employers to enforce post-termination covenants, and so they are more confident about moving to competitors immediately when previously they may have been prevented from doing so for 6 months or more.
Whilst there is a chance that the Court of Appeal’s decision will be overturned (the Supreme Court is likely to hear an appeal in early 2019), many employers are concerned about the potential damage to their business and are reviewing and updating their covenants to reflect the Egon Zehnder judgment. It is recommended that employers take advice on their restrictions to understand the impact of Egon Zehnder on the enforceability of their covenants and, where appropriate, to implement new contracts either for all staff or for those who could do the most damage to the business (e.g. senior executives, or sales staff). When issuing new contracts to existing employees, employers must remember to offer some form of consideration – such as a salary increase, one-off bonus, additional day’s holiday – in exchange for the new terms of employment.
The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.
