Reviewing employee’s restrictive covenants on promotion

Posted on: January 1st, 2017

In the recent case of Egon Zehnder Ltd v Mary Caroline Tillman, the High Court decided that the point of time at which the reasonableness of a non-compete clause in Mrs Tillman’s employment contract should be judged was the time when she entered into the contract, even though she had been promoted to a very senior role by the time she handed in her resignation notice.

The legal position is that a restrictive covenant is of no legal effect if it prevents an employee from working  unless the employer has a legitimate business interest to protect and that the protection provided by the restrictive covenant  is no more than  reasonably necessary, having regard to the interests of the employer, employee and the public interest. A court will consider whether some lesser form of protection for an employer would provide better protection for the employer, such as non-solicitation, non-dealing or confidentiality contract clauses.

The reasonableness of a restrictive covenant is assessed by the courts at the time the restriction is entered into; typically at the commencement of employment. It is either legally valid or invalid from the outset. If it is held to be invalid from the beginning, it cannot be held to be valid at a later date just because the employee’s circumstances have changed. The court will also look at what the parties intended at the time the contract was entered into.

If a post-termination restrictive covenant is held by a court to be unreasonable, it is void and not enforceable by the employer. Even if a covenant is reasonable, an injunction to prevent a breach of the covenant may only be granted at the discretion of the court. The court will consider the competing interests of the employer and employee and whether the employee’s breach can be compensated by other means.

The case may be helpful for any employer who has evidence that they recruited an employee with a clear expectation of training or preparing that employee from the outset for a more senior role.

Employers are advised to ensure that the restrictive covenants in their staff employment contracts are appropriate to the role into which each employee is hired. Employers should also consider requiring an employee to enter into fresh restrictive covenants following a promotion, if the existing restrictions would no longer be relevant and adequate to protect the employer’s business.