Kiera has over 20 years’ experience in employment law, acting for employers in contentious and non-contentious matters. Her client list includes leading NI Companies and large employers.
Kiera’s experience covers day to day HR problems and complex restructuring issues. She has given advice on a restructure and redundancy programme involving more than 800 employees, defended multi claimant tribunal claims for unfair dismissal arising from TUPE transfers. She recently advised on the high-profile acquisition of Wrightbus and the sale of Novosco.
She also assists with strategic decisions, successfully managing the exit of senior executives including any contentious issues with shareholding and restrictive covenants.
What the legal press says about Kiera:
- heads the department and handles contentious and non-contentious employment matters. Sources speak to her solid reputation and commend her commercial outlook, calling her a “business-focused employment lawyer.”
- provides “an excellent level of service”
- “has an excellent grasp of the commercial aspects of employment law.”
- She is commercial, pragmatic and knows which battles to fight.
- ...an excellent service in a timely manner
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Restrictive Covenants are used by Employers to prevent an ex-employee from working in a competing business or from soliciting ex-customers. In her latest article Kiera Lee, Director in Mills Selig, considers the recent Supreme Court decision in the case of Tillman v Egon Zehnder Ltd [2019] UKSC 32, and outlines what impacts this now has on the enforceability of these clauses.
Where to start? ⚓︎
The starting point is that a restrictive covenant which prevents an ex-employee from working in a competing business or from soliciting ex-customers is prima facie (on first impression) void because it is in restraint of trade, unless the employer has a legitimate business interest to protect. The courts have held that this legitimate interest extends only to:
- trade secrets; and
- highly confidential information equivalent to trade secrets (for example trade connections – this can cover the employer’s relationship with its customers and its workforce), which if disclosed would cause real harm to the employer.
Provided that the employer has a legitimate business interest to protect, they then must also ensure that the covenant is drafted reasonably in terms of both area (this is often either geographic area or area of the business) and duration of the restriction, and that it is no wider than necessary to protect the employer’s position.
A covenant which offends any of these principles will be void and unenforceable. Employers may continue to use unenforceable covenants to deter employees from competing, but they should be aware that where an ex-employee disputes its enforceability it could end up being scrutinised by a solicitor or the court. In these circumstances employers often seek to reach agreement with the ex-employee on alternative restrictions rather than have their covenants tested.
Do the courts have the power to amend covenants? ⚓︎
The Court of Appeal case of Attwood v Lamont [1920] 3 KB 571 has remained good law for almost 100 years until earlier this month, when it was reversed by the Supreme Court in the case of Tillman v Egon Zehnder Ltd [2019] UKSC 32.
The ruling in Attwood expounded the circumstances in which the courts could amend a void and unenforceable covenant so that it would become enforceable – the law of severability. Per Attwood, a restrictive covenant could only be amended by the courts if:
- the part(s) proposed to be severed were independent from the remaining obligations and the removal of the severed part(s) did not affect the meaning of what was proposed to remain;
- the covenant was part of a number of distinct covenants, not where there was only a single covenant; and
- the words of the part(s) proposed to be severed “were confined to the trivial and the technical”.
In overturning the first instance decision in Attwood, the Court of Appeal rejected the lower court’s view that “severance always was permissible when it could be effectively accomplished by the action of a blue pencil” - the blue pencil test.
The effect of the Attwood ruling, and others that followed, was that parts of a single covenant could not be severed (if there was only one covenant) whereas distinct covenants could potentially be severed (but then only if the proposed parts to be severed were trivial and did not impact the remainder of the clause).
In the case of Beckett Investment Management v Hall [2007] EWCA Civ 613, the Court of Appeal rejected the approach of Attwood and set out its own criteria and introduced the “blue pencil” test.
Severability of covenants – Now ⚓︎
Earlier this month, in the Tillman case, the Supreme Court overruled Attwood and affirmed that the courts should apply the approach set out in Hall, albeit slightly modified (see point 2) when presented with alleged unenforceable restrictive covenants. The Supreme Court decision confirmed once and for all that, the courts are no longer restricted from severing clauses only where there is more than one, distinct covenant. In considering the question of severance, the critical factors are:
- The unenforceable words must be able to be severed without needing to add or modify the wording that remains (the “blue pencil” test); and
- The removal of the severed words must “not generate any major change in the overall effect of all the post-employment restraints in the contract”. This wording is a slight tweak to that set out in Hall. Essentially, the burden is on the employer to show that the removal of the severed words does not alter the character of the contract such that it becomes a different contract to what the parties originally entered into.
The court’s power in applying the blue pencil test is limited to removing words; it cannot rewrite the clause by adding or amending the existing wording. In the same way, the court cannot substitute a duration in a covenant which is too long and therefore unenforceable for a shorter time limit which is enforceable.
Conclusion ⚓︎
The Supreme court decision may appear to be favourable to employers as it gives more leeway on the interpretation of unreasonable covenants, but the three main principles of enforceable covenants remain the same. Employers still need to have a legitimate interest to protect, the covenants must be reasonable in area and duration, and no wider than necessary to protect those interests.
The Tillman case is not a licence to rewrite unreasonable clauses, but it does create uncertainty for employees. This may dissuade them from testing clauses, at least until there is some case law on how the modified test will be applied by the courts.
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