9th August 2017

Post termination restriction invalid because of hypothetical scenario

At a glance

The Court of Appeal has decided that a non-compete restriction in a contract was void because it did not contain a provision allowing the employee to have a minority shareholding in a competing business after termination, even though the employee had no intention of holding any shares. Will Walsh from RB’s Employment Team explains this decision further.

In the case of Tillman v Egon Zegnder Ltd, Ms Tillman left her employment to join a competitor. Egon Zegnder Ltd brought legal proceedings against her, alleging that her move was in breach of the six month non-compete clause in her contract of employment.

The clause in Ms Tillman’s contract stated that, for a period of six months from the termination of her employment, she could not “directly or indirectly engage or be concerned or interested in any business carried on in competition with any business of the Company”.

The Court concluded that the non-compete clause was wider than absolutely necessary to protect the Company’s legitimate business interests.  It decided that the words “concerned or interested in” did not only mean that Ms Tillman should not be actively involved in competing business, it also extended to her holding any shares in a competing business.  If she only had a minority shareholding but did no actual work for the competing business, this would not have any impact on the Company’s legitimate business interests. Therefore, as the wording was broader than absolutely necessary, the entire clause was deemed void.

Interestingly, it was not Ms Tillman’s concern that she could not own shares. She had no actual intention of holding any shares at all. However as the clause prevented her from doing so in theory, this in itself made the clause void, which in turn meant that she was free to work for a competing business.

What does this mean for employers?

This case underlines the importance of getting the wording of post-termination restrictions exactly right.  It also demonstrates that employers must be mindful of theoretical scenarios as well as their main concerns.

In this particular case, the situation could have been avoided if the company had included specific wording in the restrictions permitting a shareholding of up to 5% in another company.  Had that been included in this case, the restriction would have been upheld and the company would have been entitled to an injunction preventing Ms Tillman from working for the competitor.

If you would like to understand more about the implications of this case or would like any guidance on the wording of the post-termination restrictions in your contracts of employment, please contact Will Walsh by emailing Will or calling him on +44(0)1293 559540.

This document is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from taking any action as a result of the contents of this document.

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