UK: Supreme Court’s View on Post-Termination Restrictions

By Sophie Vanhegan September 23, 2019
UK: Supreme Court’s View on Post-Termination Restrictions

​The United Kingdom (U.K.) Supreme Court recently delivered its first judgment in a century on post-employment restrictions after termination. This article examines what the Tillman v. Egon Zehnder decision's endorsement of the "severance test" means for restrictive covenants.

The plaintiff was a headhunter for Egon Zehnder. In her employment contract, she agreed not to "directly or indirectly engage or be concerned or interested in" any competing business for six months after she left Egon Zehnder's employment—a noncompete restriction.

She resigned and left Egon Zehnder in January 2017 and then sought to work for a competitor in May 2017 before the noncompete expired. As a guiding rule in the U.K., post-termination restrictions will be unenforceable if they are broader than is reasonably necessary to protect a legitimate business interest of the employer.

The plaintiff argued that the noncompete was unenforceable because the words "interested in" prevented her from holding even a small number of shares in a competitor, and it was therefore unreasonable. The Court of Appeal agreed with her, so refused an injunction prohibiting her from joining a competitor before the noncompete expired.

Supreme Court Decision

Following its Court of Appeal defeat, Egon Zehnder appealed to the Supreme Court. The Supreme Court accepted that the words "interested in" were unenforceable but held that they could be struck out or "severed" from the rest of the noncompete clause, so that the noncompete became enforceable. So, Egon Zehnder won.

The Supreme Court held that there are three criteria to meet in order for severance to be possible:

  • The so-called "blue pencil" test—the employer must be able to remove the offending words without needing to add to or modify the remainder of the covenant.
  • What remains must continue to be supported by adequate "consideration," such as salary having been paid during employment.
  • The removal of the offending provision must not generate any major change in the overall effect of the post-termination restrictions for the contract. It is for the employer to prove this criterion, which is a new test.

If an employer has a post-termination restriction that would be enforceable if it can sever some words within it, these are the criteria that should now be checked to see if the courts would allow this.

[SHRM members-only toolkit: Introduction to the Global Human Resources Discipline]

What the Decision Means for Employers

There are a few takeaways from this decision for employers, including:

  • More employers may try to enforce restrictions that have a few words that may be too broad and therefore unreasonable, on the basis that the words can be severed.
  • Expect to see more arguments between employers and employees as to whether risky words can be deleted from covenants without generating a major change in the overall effect of the post-termination restrictions.

However, the Supreme Court has left open who bears the costs when an employer successfully persuades a court to sever certain words from a restriction in order to make it enforceable. The employer may still have to pay some or all of the legal costs for not getting the drafting of its restrictions right in the first place.

Professional Pointer: This decision may encourage employers to attempt to enforce imperfectly drafted restrictions, but what constitutes a "major change" in the new test is unclear and will need to be defined by future case law. Employers should therefore carefully draft post-termination restrictions so that they don't have to rely on a severance argument.

Sophie Vanhegan is a partner with GQ|Littler in London.



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