Non-Compete Clause and Expectations of Future Promotion
When an employee is promoted what happens to the enforceability of any existing restrictive covenants in their contract?
The recent High Court case of Egon Zehnder Ltd v Mary Caroline Tillman considered the point in time at which the reasonableness of a non-compete clause should be judged where an employee entered into restrictive covenants as a junior employee but had been promoted to a very senior role by the time her employment terminated.
The legal background
A restrictive covenant will be void for being in restraint of trade unless the employer has a legitimate business interest to protect and the protection sought is no more than reasonable having regard to the interests of the parties.
The reasonableness of a restrictive covenant is assessed at the time the contract is entered into. It is either valid or invalid; it cannot subsequently become valid at a later date in light of changing circumstances.
Mrs Tillman joined Egon Zehnder Ltd (EZ) as a consultant in January 2004, at which point she signed an employment contract containing a 6-month non-compete clause. EZ is the UK subsidiary of a worldwide group which offers professional services, with a focus on executive search.
Mrs Tillman had previously worked as an investment banker where she gained a good reputation. At the time, she was recruited by EZ, she was seen to be a “considerable prize” and was expected to be a rising star, therefore her starting salary and guaranteed bonus was higher than most consultants.
Mrs Tillman was promoted early in 2006, again in 2009 and in 2012 she became co-Global Head of the Financial Services Practice Group. She did not sign a new contract during any of these promotions.
In January 2017, Mrs Tillman resigned on notice. One week later EZ terminated her contract with immediate effect and paid her in lieu of notice. Subsequently Mrs Tillman notified EZ that she was going to work for a competitor from 1 May 2017. EZ sought an injunction, alleging that Mrs Tillman was in breach of her non-compete clause which prevented her from joining a competitor until 30 July 2017.
Mrs Tillman argued that the non-compete clause had been unenforceable when the parties entered into it at the start of her employment, in particular it went further than was reasonably necessary in light of her original duties as a ‘consultant’.
The High Court held that it was correct to assess the covenant at the time Mrs Tillman entered into the contract. On this basis, the non-compete clause would not have been considered appropriate for a consultant role. However, the Court added that consideration should also be given to what the parties anticipated Mrs Tillman’s prospects were in the future. As it was in the contemplation of the parties at the time of entering into the contract that Mrs Tillman would be rapidly promoted and that she would have more client engagement and involvement in strategic matters, the non-compete was justified and that a duration of 6-months was appropriate.
This case provides a useful summary of the existing rules. The case will not assist employers seeking to enforce historic covenants entered into when the parties had no contemplation of promotion, although may be helpful for those employers who can show that they recruited an individual with the expectation of preparing them for promotion.
However, it is safer to ensure that restrictions are tailored to the particular employee at the time they signed the contract and the employer should consider requiring an employee to enter into fresh restrictions upon a promotion.