‘Blue pencil test’ upheld by the Supreme Court…
25th July, 2019
‘Blue pencil test’ upheld by the Supreme Court means that the removal of offending words from a restrictive covenant can preserve enforceability.
At the beginning of an employment relationship where employer and employee are generally amicable and keen to develop the relationship, it is often easy to pay less attention to post-termination restrictive covenants.
However, when a key employee decides to leave and there is a risk of losing valuable customers, contacts and know-how, the restrictive covenants contained within the employment contract become one of the most scrutinised aspects on termination.
It is important to note that restrictive covenants can only be valid where they do not reach further than is necessary to protect the employers’ legitimate interests. However, it is possible for a Court to sever a clause and thus leaving the rest of the clause in place in order to preserve an otherwise unenforceable restrictive covenant (blue pencil test).
In Tillman v Egon Zehnder , Ms Tillman’s employment contract contained a clause stating she would not “directly or indirectly engage or be concerned or interested in any business carried on in competition with any of the businesses of the Company…” within 6 months of the termination date. When Ms Tillman left to work for a competitor she argued that the words “or interested” were so wide that the entire clause was unenforceable. Further, this prevented her from even owning a minority share in a competitor company and therefore extended beyond what was reasonable to protect the legitimate interests of her previous employer.
Whilst the Court of Appeal agreed with her argument, the Supreme Court took a more liberal approach and held that the words “or interested” could be removed and the restrictive covenant would still apply and prohibit her from entering into the proposed employment. The Supreme Court’s judgement at paragraph 88 summarises the position as follows:
“First, the words “or interested” are capable of being removed from the non-competition covenant without the need to add to or modify the wording of the remainder.
And, second, removal of the prohibition against her being “interested” would not generate any major change in the overall effect of the restraints. So those words should be severed and removed.”
Although the decision in this case provides employers with some comfort, relying on this approach is discouraged and professional advice should always be sought.
3 top tips:
- Restrictive covenants should be looked at in detail at the beginning of the employment relationship and tailored to each individual employee.
- Restrictive covenants should be reviewed regularly as changes in job roles may require different types of restrictions.
- Where employees are being asked to enter into new restrictive covenants during their employment or on or after termination, there should be consideration, for example, in the form of a payment in order to become binding.
For more information regarding this matter, please contact Helen Watson.
Partner & Head of Employment.
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