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31 July 2017

63: Future promotions can be considered when deciding reasonableness of restrictive covenants

In Egon Zehnder Ltd v Mary Tillman, the High Court has ruled that although the reasonableness of restrictive covenants must be judged when they were entered into, the parties’ expectations of future promotions at that time may also be taken into account in exceptional cases.

In 2004 Mrs Tillman was recruited by Egon Zehnder, an executive search company, to work as a consultant in their financial services group. Her starting salary and guaranteed bonus were unusually high because she was seen as a ‘considerable prize’. This turned out to be true and she received several promotions unusually early. By 2012 Mrs Tillman was Co-Global Head of the Financial Services Practices Group. Since she had not signed any new contracts of employment with each promotion, she was still employed under the terms of her original 2004 contract.

In early 2017 Mrs Tillman resigned and informed Egon Zehnder that she was going to work for a competitor. Egon Zehnder applied for an injunction against her, alleging that she was in breach of the six-month non-compete clause contained in her 2004 contract. Mrs Tillman argued that the non-compete clause had been unenforceable when the parties entered into it at the start of her employment because it was wider than reasonably required to protect the company’s legitimate business interests given her relatively junior role at that time.

The High Court confirmed that the correct approach was to look at the employee’s status at the time the covenant was entered into. In this case, the non-compete clause would have been too wide for a normal consultant role and therefore unenforceable. However, the High Court held that it was also appropriate to take into account the parties’ expectations of Mrs Tillman’s future prospects. It was in the contemplation of both parties in 2004 that Mrs Tillman would be rapidly promoted, and that she would therefore have a higher level of client engagement and involvement with strategic matters than would usually have been expected. Since these were protectable business interests, the High Court concluded that the non-compete provision was enforceable.

This case may assist employers who can show that they recruited an employee with the clear expectation of rapid promotion to a senior role. However, in order to minimise the costs and risks involved in litigation, restrictive covenants should always be tailored to the individual employee at the time they are entered into, and employees should be required to enter into fresh restrictive covenants upon a promotion if the existing restrictions are no longer adequate.

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