As an employer, you may have heard of restrictive covenants. You might have even included one in an employee’s contract.
Designed to protect your business, restrictive covenants act as cover for when an employee leaves your business.
They could prevent the ex-employee from:
- Working with a competitor
- Poaching ex-colleagues
- Working with your customers
Whatever restrictive covenant you want to impose, the restrictions must be reasonable or they risk being deemed invalid.
Victory for employers
For the first time in over a century, a case examining restrictive covenants reached the Supreme Court.
The case in question? Tillman v Egon Zehnder Ltd. Let’s break it down for you.
A non-compete restriction existed in Tillman’s contract. One of the restrictions prevented Tillman from being “concerned or interested in” any competing business.
What does “interested in” mean?
Careful consideration was given to the meaning of the words “interested in”.
The Court of Appeal found that a covenant prohibiting Tillman from holding shares in a competitor’s company was unreasonable.
While the Supreme Court agreed with the Court of Appeal’s interpretation, it also found that removing the words “interested in” from the clause would save the remaining restrictions.
The Supreme Court decision to uphold the remaining restrictions has been hailed as a “victory for employers”.
Careful what you say
Be careful when wording your restrictive covenant. If it’s too broad, it will be void as an unreasonable restraint of trade.
If a restrictive covenant is to be enforceable, it must be:
- Specifically drafted to reflect the seniority of the employee’s role
- Be reasonable in scope (duration and geographic area are key factors to consider)
A one-size-fits-all approach to restrictive covenants runs the risk of exposing your business to legal challenges from frustrated ex-employees.
Legitimate business interest
It is also important to remember that restrictive covenants will only be enforceable if they protect a legitimate business interest.
You must be in a position to demonstrate that the only way to protect your legitimate business interest is to ask the employee to agree to post-employment restrictions.
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