Employee non-compete clauses: what is acceptable?

When hiring for business-critical roles, a tightly worded non-compete clause is often an important element in the contract. Top-level staff will have access to confidential projects and important relationships. An unexpected or contentious departure can expose a business to significant risk. This exposure is heightened where the individual intends to join or invest in a competitor. The Supreme Court recently ruled on a non-compete clause, analysing it fully for the first time in a hundred years or so. The judges took the opportunity to refresh the law on restraint of trade, clarifying the circumstances in which words can be removed or “severed” to convert what would otherwise be an unenforceable clause into one that is legally effective.

Interesting wording

Ms Tillman was a senior recruitment consultant specialising in the financial services sector. She had entered into a contract of employment in which she had promised not to “directly or indirectly engage or be concerned or interested in” any competing business for a period for 12 months after the end of her employment. Her employers sought to enforce this promise when she left to work for a competitor. 

It is widely accepted that being “interested in” a competing business, in this context, can include holding any kind of shareholding, even a minority stake. The Supreme Court concluded that if the words "or interested" remained in the clause, it would be unenforceable as an unreasonable restraint of trade. However, if these words were excluded, the clause would be reasonable and therefore enforceable. So the judges had to decide whether to accept the employer's request to strike out the offending words.  Two questions were important:

Firstly, could the offending words be removed without adding to or modifying the wording of what remained? In other words, did deleting the words satisfy the “blue pencil test”? The answer to that was clearly yes.

Secondly, did the removal of the words change the essential character of the contract which the parties had entered into? The Supreme Court decided to reformulate this question (which had emerged from previous case law) into the following: would removal of the words “generate any major change in the overall effect of all the post-employment restraints in the contract”?  The Supreme Court concluded that it would not and the offending words could be deleted.

Take away points

So where does this leave us?  

  • Welcome news for businesses, as the courts are prepared to enforce reasonable post-termination restrictions. Clauses of this nature remain an important safeguard for employers to protect their business from unfair competition when an employee leaves, particularly where they are in possession of commercially sensitive information, trade secrets or key customer connections;
  • Employers and their lawyers need to think carefully about how the clause is put together: each element of each restriction will need to be defended as reasonable;
  • Restraining a departing employee from being a shareholder in a competing business (even if this is a minority interest) will be regarded as being in restraint of trade and therefore unenforceable; and
  • You cannot assume that a court will necessarily be prepared to convert an unreasonable obligation into a reasonable one by striking out offending words, even if the blue pencil test is satisfied. The Supreme Court has attempted to make the criteria which will be applied clearer, but the issues will not always be clear cut.

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