Home Legal News Businesses warned to consider effect of non-compete clauses

Businesses warned to consider effect of non-compete clauses

The case of Egon Zehnder v Tillman has brought the use, reach and effect of non-compete clauses by employers to the fore.

Ms Tillman was hired by global recruitment company, Egon Zehnder, in 2004. Having reached the position of global head of financial service, she handed in her notice in January 2017 with the intention of joining a competitor firm (Russell Reynolds Associates). She was placed on gardening leave with immediate effect.

Her employment contract included a non-compete clause, among other post-termination restrictions, preventing MsTillman from being “directly or indirectly engaged or concerned or interested in any business carried on in competition with [Egon Zehnder]” for a period of six months.

Egon Zehnder was granted an interim injunction by the High Court to enforce the clause and its protection.

Ms Tillman appealed to the Court of Appeal in July 2018, on the basis that the clause was too wide and as such unreasonable since it also prevented her from becoming a shareholder in a competitor. The court found in her favour and the clause was voided.
Egon Zehnder appealed to the Supreme Court, the central issue being whether the words “interested in” render the covenant too wide in preventing Tillman from holding shares in a competing business.

The case came before the Supreme Court on the 21st and 22nd January 2019 and a decision is currently awaited.

The risks of relying on non-compete clauses

Non-compete clauses are used by employers to protect their business from unfair competition. They are restrictive covenants within employment contracts designed to prevent the employee from setting up in competition or from joining a rival business for a specific period of time. 

Non-compete clauses may however be challenged in court by the employee, typically where the wording is too vague or the clause overreaches, so as to render the clause void. 

The default position of the court is to consider each case from position that the clause is void, given the impact of enforcing the clause is to restrain trade. The burden of proof is on the employer to prove the protection was necessary at the time the contract was entered into. This will usually be on the basis of legitimate commercial interests such as safeguarding trade secrets.

Egon Zehnder v Tillman is the most recent consideration of these issues, among others.
Regardless of the outcome, the case does highlight the risks of relying on non-competes and restrictive covenants within employment contracts, and the effect of the specific wording within the clause used at the time the clause is entered into.

For businesses, those in sectors where non-compete clauses are common practice such as tech, professional services, IT, pharma and finance, the ruling may precipitate a reconsideration of non-competes to protect commercial interests particularly in light of potential challenges to provisions at risk of being deemed overly wide and onerous.

Businesses warned to consider effect of non-compete clauses 2
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