Non-compete clause: consideration given to expectations of future promotions when determining reasonableness

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The recent High Court case of Egon Zehnder Ltd v Mary Caroline Tillman has found that, although the reasonableness of a non-compete clause should be assessed at the time the contract is entered into, the parties’ expectations of future promotions should also be taken into account.

Facts
Mrs Tillman was initially hired by Egon Zehnder Ltd (EZ) as a consultant in 2004, at which point she signed an employment contract containing a 6 month non-compete clause. At the time she was recruited, Mrs Tillman was seen to be a “considerable prize” and given a starting salary and guaranteed bonus higher than normal.

Mrs Tillman was promoted unusually early in 2006, again in 2009, and by 2012 she was the Co-Global Head of the Financial Services Practice Group. However, she did not sign new contracts with each promotion and was consequently still employed under the terms of her original 2004 contract.

In January 2017, Mrs Tillman resigned and then notified EZ that she was going to work for a competitor from 1 May. EZ sought an injunction against Mrs Tillman, alleging that she was in breach of her non-compete clause which prevented her from joining a competitor until 30 July.

Decision
Mrs Tillman argued that the non-compete clause was unenforceable because it was wider than reasonably required for the protection of legitimate business interests. However, the High Court decided to uphold the restrictive covenant and granted an injunction against Mrs Tillman.

The High Court held that the correct approach when assessing whether a covenant is reasonably necessary is to look at the employee’s status at the time the covenant was entered into. On this basis, the non-compete would not have been considered appropriate for a consultant role. However, the High Court further explained that consideration should also be given to what the parties anticipated Mrs Tillman’s prospects were in the future. Consequently, because it was within the contemplation of both parties in 2004 that Mrs Tillman would be rapidly promoted and that she would have more client engagement and involvement in strategic matters than was usual, the non-compete was justified.

Comments
Restrictive covenants are void for being restraints on trade unless they go no further than reasonably necessary to protect a legitimate business interest of the employer. The reasonableness of a particular covenant is assessed by the courts at the time it was entered into. Therefore, a restriction entered into by a junior employee which is reasonable after significant promotion will still fail if it was not reasonable when they signed up to it. In this case, the employer was successful because it could show that, at the date of the contract, the parties anticipated fast promotion for the employee and a greater engagement than would be usual for a junior employee with protectable interests (which did in fact occur). This meant the restriction was reasonable.

Although employers may sometimes be able to show this sort of expectation for a junior employee, it is safest to ensure that restrictions are tailored to the particular employee at the time they are signed and that, on promotion, employees are asked to sign up to new restrictions commensurate with their new status and engagement with protectable business interests.

 

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Kerry Garcia, Lloyd Davey

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