Supreme Court rules on wording of non-compete clauses: what's the impact on your employment contracts?
Published on 3rd Jul 2019
The Supreme Court (SC) has today (3 July 2019) issued its ruling in an eagerly awaited judgment on whether widely used language in non-compete provisions has the effect of voiding any restriction on an employee joining a competitor. Many feared a decision upholding that of the Court of Appeal (CA) would leave many senior executives and key employees free to join competitors, and others reluctant to sign new enforceable provisions without a significant incentive to do so. The SC decision brings some good news for employers but reinforces that particular care must be taken in their drafting and that these provisions must be kept under regular review.
What was the issue here?
Here, the employer's post-termination restrictive covenant sought to prevent a former employee, from being "engaged, concerned or interested in" a competitor for six months. The CA interpreted the phrase "interested in" as being too wide to be enforceable, since it could even prevent a person from taking a share-holding, albeit minor, in a competing company. This decision therefore left the employee free to work for a new, competing employer.
What did the Supreme Court say?
The SC has found that the words "interested in”, properly construed, do prohibit any shareholding, but that the court is free to apply the 'blue pencil' test to post-termination restrictions to sever any language rendering the provision unenforceable, subject to three specific criteria being met. The SC has now established categorically that the correct approach to severance in restraint of trade cases is to ask whether:
- The unenforceable provision is capable of being removed without the necessity of adding to or modifying the wording of what remains – this is the so-called “blue pencil” test.
- The remaining terms continue to be supported by adequate consideration. This will not usually be in dispute.
- Removal of the provision would not generate any major change in the overall effect of all the post-employment restraints in the contract.
If these three criteria are met, an employer may seek to have wording removed which might otherwise have rendered their restriction unenforceable.
What should employers do now?
Business protection is a critical concern for employers and particularly in a market of increasing competition and digital innovation. Employers should therefore use this decision as an opportunity to review any post-termination restrictions, particularly for senior and key employees.
Post-termination restrictions will be assessed on the basis of the circumstances at the time the employee entered into them. Here the employee had signed the employment contract containing the potentially offending restriction in 2004 as a consultant. She resigned in 2017, by which time she had been promoted to the role of co-Global Head of the Financial Services Practice Group.
Where it is considered that the use of the word 'interested in' is necessary to protect an employer's legitimate business interests, care must be taken to ensure that this element of the restriction only goes so far as is necessary by, for example, allowing the former employee to still hold some form of minor shareholding in a competing business – something which is already commonly allowed during the employment relationship itself.
