Restrictive Covenants - keep them up to date
Author: Simon Fennell
Applies to: England and Wales
Protecting your business through restrictive covenants is a great idea and can be very effective. However, if the clauses and restrictions do not grow and evolve with your employee's progression with you, their enforceability will be jeopardised.
Restrictive covenants must be reasonable and must go no further than to protect the employer's legitimate business interests if they are to be enforceable. While the interests of the employer will generally remain the same over time, their application to the individual will change as the career of the individual develops.
Most arguments about restrictive covenants arise at the end of the employment relationship. However, when a court is asked to determine the enforceability of a restrictive covenant, it will have to consider the job role of the employee at the point when the covenant was entered. Restrictive covenants should therefore be appropriate for the role in question or they risk being unenforceable.
In Patsystems Holding Ltd v Neilly (2012), Mr Neilly was subject to a 12 month non-compete provision within his contract of employment. He had been employed by Patsystems for 12 years and had been promoted to Director of Global accounts seven years before he resigned to take up employment with another business within the same field. When asked to determine enforceability, the court noted that those clauses that were applicable on termination from the role as Director of Global accounts were the same as those that had been imposed on Mr Reilly when he took up employment as an account manager (on less than half the salary) 12 years previously. In those circumstances the court held that the 12 month non-compete clause was unreasonable at the point the contract was signed in 2000 and, as it had not been amended over time, could not be enforced.
The Patsystems case was followed in Bartholomews Agri Foods Ltd v Thornton (2016) when the court considered restrictions that were said to apply to an employee who had been employed by the company for 18 years. Mr Thornton had started with the business as a trainee who had no contacts in the industry and no experience. Further, at the start of his employment, the employee only had access to customers that generated 1% of the company's revenue but the restrictions sought to prevent him from working for a competing business for six months after termination and therefore excluded him from dealing with any of the customers of the business at the point that he left. By the time he ended his employment, Mr Thornton was a very experienced and crucial member of the business and had access to many customers. However, his covenants had not been developed and extended to keep up with his position within the business. Consequently the clauses were unenforceable and he was able to take up employment with a competing business.
Recently the court had to consider a slightly nuanced position of this general principle in the case of Egon Zehnder Ltd v Tillman (2017). In this case Mrs Tillman was recruited into Egon Zehnder's recruitment business in 2004 from a distinguished career in investment banking. Her recruitment was something of a coup and meant that while she was taken on as a consultant (the lowest of three rankings within the business) she was given a higher salary and bonus than would normally be expected. By January 2009 she had reached the level of Partner in the business and in 2012 became the co-Global Head of the Financial Services Practice Group. She was never given a new contract to sign. When Mrs Tillman advised EZ that she wished to take up a position with a competitor in New York, the business sought and obtained an injunction against her. While it was accepted that the six month non-compete provision had been in place since she was a consultant, the restriction was no less than was necessary to protect the business when taking into consideration the rapid promotion that was expected for her when she started work. The clauses had therefore been prepared and accepted with the expectation (that was supported by evidence) that Mrs Tillman's role would include work that would quickly involve greater strategic contribution than that of a consultant.
These cases therefore show how crucial it is to consider appropriate restrictions at the start of each stage of an employee's career. In order to be an effective tool, restrictive covenants should not be prepared and forgotten about. The employment relationship is an evolving one and the restrictions should evolve with the employee.
Our top tips
- Do not use standard templates across the business, make sure that any restrictions are tailored to the role and seniority of the individual.
- Review the restrictions regularly and update them to extend the provisions where it is clear that the employee's role means that their departure to a competitor would place the business at risk.
- Keep a record of the reasons why the restrictions were extended to include the types of business in which the employee is involved, the main customers and contacts that they deal with and the rationale for the duration of the restrictions.
- Ensure that any amendment to the contract is accompanied by evidence that the changes are directly linked to a promotion, change of position or pay rise so as to avoid any arguments about consideration.
This document is for informational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.