Don't be restricted by your restrictive covenants


Don't be restricted by your restrictive covenants

restrictive covenantsRestrictive covenants are one of a number of business protection tools which can limit departing employees conduct thereby protecting your business from loss or damage.

The importance of well-drafted restrictive covenants is not a new concept. A recent case has emphasised this point.

What's new?

In the case of Tillman v Egon Zehnder Ltd, Ms Tillman had been employed for a number of years under a contract which contained post-termination restrictive covenants. When she was hired, there was expectation on both sides that she would be promoted quickly, and in 2012 she was appointed to a senior position. Her post termination restrictive covenants were drafted with more senior positions in mind and her non-compete restriction provided that she was not to be “engaged, concerned with or interested in” a competing business for 6 months after termination. On the face of it, not unreasonable. Ms Tillman resigned and informed her employer that she wished to work for a competitor. Her employer sought an injunction to stop her from doing this and to enforce the post termination restrictive covenants.

Why does it matter?

The Court of Appeal agreed with Ms Tillman that the wording of the non-compete restriction prevented her from being “interested in” a competing business which would prevent her from becoming a shareholder in that business. Whether she wanted to become a shareholder in a competing business or work for it did not matter, the effect of the clause was much wider than was necessary in order to protect the legitimate business interests of her employer and was therefore void.

The Court also confirmed that the validity of the restrictive covenant must be judged as at the time the contract was made and not after Ms Tillman had been promoted. Even if the words "interested in" had been removed from the clause, the clause would still have been too wide.

What does this mean?

This case highlights the importance of careful drafting of non-compete clauses. If relatively wide wording is used to restrict involvement in a competing business, there should also be a clause allowing the employee to hold minimal shareholdings for investment purposes. This will help to avoid an unwanted ruling if challenged in court. There is always a temptation to draft restrictive covenants as widely as possible, but if they go further than is necessary to protect the legitimate interests of the business then there is a real risk that they will not give the business the protection it sought.

For further guidance, please contact Abigail Maino, Associate - Employment, to start a conversation.

Abigail Maino, Associate, Employment

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Published: 16 Oct 2017

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