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Stop an ex-employee competing with you but be careful

5th August 2019

It is a common situation; an employee leaves, believing that the grass really is greener on the other side and joins a business that competes with the business they are leaving.

Typically the employee’s contract covered this eventuality, with them agreeing that for a period after leaving the business, they will not directly or indirectly engage or be concerned in any business carried on in competition… or something along these lines.

However, as common as non-compete clauses are in employment contracts, they are not without their problems for the employer, particularly if the restrictions are too wide.

The question is whether the whole non-compete clause can be ignored or can the restrictions be narrowed by the courts to allow the employer to effectively limit the competitive actions of an ex-employee?

Cross out and keep calm

In a recent case heard before the Supreme Court, Tillman v Egon Zehnder Ltd, it was ruled that the Court can indeed “cross out” the part of the restriction that is too wide, allowing the rest to be enforced as intended.

In this case, Ms Tillman tried to join a competitor, having resigned from Egon Zehnder (‘EZ’), and EZ sought an injunction to prevent her doing so. They relied on the non-compete clause in her employment contract which stopped her being ‘concerned or interested in’ a competing business.

However, Tillman argued that as the non-compete clause was unreasonably wide, it was unenforceable.  She claimed the restriction was so wide it prevented her from even owning a small shareholding in a business competing with EZ, rather than necessarily working day to day for them.

The Supreme Court agreed that the clause did have this meaning, with the ‘offending’ words in the clause being ‘or interested’, which they deemed went too far in preventing Ms Tillman being a shareholder in a competitor.

Whilst the Supreme Court ruled this aspect of the restriction should be removed, they decided that once the offending words were deleted, the remaining restriction was reasonable and could be enforced.

The Court of Appeal had previously overturned the injunction granted by the High Court to prevent Ms Tillman from breaching the non-compete clause in her contract, but it was now reinstated thanks to this ruling by the Supreme Court.

A sting in the tail

It is clear from this ruling that although the Courts recognise employers must be allowed to protect their businesses from departing employees, they must not unjustifiably restrict what an ex-employee chooses to do after leaving, as it might unreasonably adversely affect how they earn their living.

This ruling is a victory for employers, but it remains difficult, both legally and practically, to restrict employees from competing when they leave.

And if a case makes it all the way, although the Court may come to the rescue of a business and allow the rest of a restrictive covenant to be enforced, the employer may be left with a significant legal bill, turning it into a pyrrhic victory.

Consideration for employers

Before employers get too carried away with the idea of enforcing restrictive covenants, there are aspects of the practice that need to be considered carefully and ideally with the help of a solicitor experienced in drawing up contracts of employment.

Employers should review all of the post-termination restrictions in their standard employment contracts, shareholders agreements, etc., and ensure they are likely to be viewed as reasonable and necessary to protect the business from the actions of a departing employee.

In light of this recent case, a business should consider the wording carefully and ensure it does not prevent an ex-employee being a minor shareholder in a competing business, for the duration of the covenant.

Employers must examine how the restrictions are worded, to ensure a court can easily delete any offending words deemed to go too far, without affecting the implications of the rest of the restriction. Think carefully, seek advice, and reword if necessary.

If it’s time you reviewed your employment contracts, we have an experienced team ready to advise on what you should and shouldn’t include, so please contact Jason Alcock, a Senior Associate Solicitor in our Dispute Resolution team. Email him at jalcock@ansonssolicitors.com or call him direct on 01543 267 196.