Post-Termination Restrictions & Restrictive Covenants

In the case of Tillman v Egon Zehnder [2019] UKSC 32, the Supreme Court has clarified the law surrounding severance of restrictive covenants in employment contracts including Post-Termination Restrictions.

What are Post-Termination Restrictions?

Post-Termination Restrictions are restrictive covenants typically found in an employment contract to restrict and/or prohibit an ex-employee taking up employment with a competing company, soliciting existing employees and/or dealing with existing clients/customers.

In order for a restrictive covenant to be enforceable:

• The employer must have a legitimate business interest to protect (for example, protecting trade secrets and highly confidential information, trade connections and maintaining a stable and trained workforce).
• The restraint must also be reasonable in time and area i.e. it cannot be unnecessarily wide.

If a Post-Termination Restriction is too wide or the employer has no interest to protect, the restrictive covenant will be void as a restraint in trade and therefore unenforceable.

Severance: Tillman v Egon Zehnder [2019] UKSC 32

If a restrictive covenant is drafted too widely, it is possible to sever the unenforceable part of the clause so the remainder is enforceable. The Supreme Court clarified the approach to be taken in Tillman v Egon Zehnder [2019] UKSC 32 when determining the availability of severance of Post-Termination Restrictions.

In the Tillman case, the non-competition covenant included the words that Tillman would not be “interested in” any competitor for the period in question.  In accordance with the strict provisions of that term, Tillman would be unable to hold even one share in any competitor and the Courts below the Supreme Court held that this rendered the clause unreasonable and unenforceable.

There are three criteria to consider:

1. The “Blue-Pencil Test”The unenforceable provision must be capable of being removed without need to add or modify the remaining wording. You should be able to strike through the offending wording with a blue pencil without impacting on the rest of the clause.
2. Adequate considerationWhat remains will need to be supported by adequate consideration.

Major Change

Removing or severing the unenforceable part of the clause cannot create a major change to the overall effect of the Post-Termination Restriction.

On appeal in the Tillman case, the Supreme Court held that the offending words “or interested” could be removed without needed to add to the remaining wording or generate any major change in the restraint’s overall effect and that those words should be removed and the injunction given at first instance before being overturned by the Court of Appeal was restored, subject only to the removal of the words “or interested”.

Drafting Post-Termination Restrictions

Tillman v Egon Zehnder [2019] UKSC 32 has broadened the severance test. Whilst it would appear more likely that an otherwise unenforceable Post-Termination Restriction is capable of being enforceable through severance, employers should be wary of drafting wide restrictive covenants in their favour. Doing so may mean that more employees seek to challenge their Post-Termination Restrictions and leave employers having to show the clause is capable of severance which results in unnecessary costs. Not many litigants can afford to litigate all the way up to the Supreme Court, and the costs even just in first instance proceedings are off putting for many.  The mind-set of drafting the protection levels of restrictive covenants at the very least level of protection you need, rather than the most protection you want, has much to recommend it.

Next Steps

To discuss this article or any matters raised in it, contact Carol Shaw, Head of Spratt Endicott’s Employment Law practice at cshaw@se-solicitors.co.uk.

*Disclaimer: While everything has been done to ensure the accuracy of the contents of this article, it is a general guide only. It is not comprehensive and does not constitute legal advice. Specific legal advice should be sought in relation to the particular facts of a given situation.