At what point in time are restrictive covenants judged?

Written by Brabners LLP

This is an important issue for all employers, but particularly those who have employees that enter into restrictive covenants and are then subsequently promoted!

Background

As you may know, a restrictive covenant will be unenforceable for being in restraint of trade unless:

i) the employer has a legitimate proprietary / business interest to protect; and

ii) the protection sought through the restriction is no more than is reasonable having regard to the interests of the parties and the public interest.

When determining reasonableness, a court will assess the restrictive covenant by reference to the time it was entered into and consider whether some lesser form of protection would have been more appropriate at that time. The recent case of Egon Zehnder Ltd v Mary Caroline Tillman considered these principles in the context of an employee who had been continuously promoted before their employment ended and without their restrictive covenants ever being renegotiated after their initial contract of employment.

Facts

Mrs Tillman was hired by Egon Zehnder Ltd (EZ) in January 2004. At EZ, new recruits are named ‘consultants’, and can then be promoted to ‘principal’ and then finally to ‘partner’. Mrs Tillman was recruited as a consultant. She was however deemed be a ‘considerable prize’ which was reflected by her increased starting salary and guaranteed bonuses compared to the average consultant. Mrs Tillman was then promoted to principal in January 2006 and then to partner in January 2009. She did not sign a new contract of employment at the time of any of these promotions.

Mrs Tillman’s employment terminated on the 30 January 2017. Mrs Tillman then notified EZ that she wished to start work for Russell Reynolds Associates (RRA) on 1 May 2017, a company which carried out similar services as EZ. This prompted EZ to seek an injunction against Mrs Tillman – EZ asserted that Mrs Tillman would breach the six month non-compete clause contained in her original employment contract (entered into in 2004) as a result of the work for RRA.

Decision

The high court (“the Court”) considered the initial employment contract and the level of interaction Mrs Tillman was expected to have with the protectable interests of EZ at the date the initial employment contract was entered into. In adopting this approach, the Court confirmed that Mrs Tillman’s eventual status as a partner should not be taken into account.  Interestingly though, the Court did take into account the high hopes both parties held for Mrs Tillman’s future at the outset of her employment and that as a matter of fact she would have increased client engagement and a greater contribution to strategic matters than would otherwise have been expected from a normal consultant. The Court, having identified Mrs Tillman’s increased level of engagement with EZ’s protectable interests, concluded that the non-compete restraint was justifiable in this particular case.  The Court also held that thr restriction lasting for a duration of six months after termination of Ms Tillman’s employment was appropriate. The Court upheld the restrictive covenant and granted the injunction.

Comment

The case may well be helpful for other employers who can evidence that they recruited an individual where both parties had a clear expectation from the outset that there would be a promotion to a more senior role. The court did take this expectation into account in this particular case.  However, as each case will turn on its own facts, employers should still ensure that any restrictive covenants are reviewed where an employee is promoted and that any restrictions are appropriate to the particular role being undertaken by the employee at that time.

 

Disclaimer: This bulletin is for general guidance purposes only and should not be used for any other purpose. This article is written by Brabners and reproduced with their permission. Brabners is a Limited Liability Partnership.