Restrictive covenants – Supreme Court clarifies law on restrictive covenants
Under UK law, post-termination restrictions in employment contracts are considered a restraint of trade and are therefore void unless they do no more than is strictly necessary to protect the employer’s legitimate business interests. In practice, this means that employers must balance the extent of protection offered by a covenant against the risk that it will be unenforceable. This balance was considered by the Supreme Court in Egon Zehnder Limited v Tillman.
The case concerned action by an employer to enforce a restrictive covenant against a senior employee who joined a competitor post-termination. The employer argued that she had breached her non-competition restriction but the employee argued that the wording “or interested in” in the relevant clause prevented her from taking a minor shareholding in a competing company and that the clause was unreasonably wide and therefore void. The Court of Appeal agreed with this view and, importantly, refused to sever the wording, meaning that the non-compete clause was void.
In an important decision for employers, the Supreme Court overturned this finding. It held that “interested in” did cover minor shareholdings and was therefore too wide to be enforceable. However, it disagreed with the Court of Appeal and found that this wording could be “blue pencilled”. In other words, as the clause could be read without these words in a way which made sense and because the change did not generate a major change in the overall effect of the post termination restraint, these words could be deleted and Egon Zehnder could rely on the remaining non-compete clause.
Why this matters?
This is a good decision for employers, overturning the unhelpful opinion of the Court of Appeal and suggesting that courts will take a pragmatic view of drafting issues which could render an otherwise reasonable restrictive covenant unenforceable. However, it remains vital for employers who wish to rely on post-termination restrictions to ensure that they are drafted to be as reasonable as possible. This case should not be seen as a green light for the drafting of overly wide clauses on the basis that they act as a deterrent but if litigated, the courts will narrow their scope. There remains a risk that courts will refuse to do so on the basis that the outcome would be a major change and therefore not permissible. In addition, the Supreme Court indicated that employers who look to rely on this blue pencil test can also be penalised in terms of paying the employee’s litigation costs.
Egon Zehnder Limited v Tillman
Disability Discrimination – impact of concealment on employer’s constructive knowledge of disability
Discrimination arising from disability arises where an employer treats a disabled person unfavourably because of something arising as a consequence of their disability and the treatment cannot be justified. However, this does not apply if the employer doesn’t know and, importantly, cannot be reasonably expected to have known, that the employee had a disability. In the case of A Ltd v Z, the EAT considered the impact of an employee concealing their condition on whether an employer had constructive knowledge of the employee’s disability.
It was admitted that Z was disabled, in that she suffered from mental and psychiatric impairments. However, she had taken a number of steps to hide these conditions from her employer, including giving a false reason for absence in her previous role, omitting the conditions when completing a form provided by her employer and attributing her significant periods of absence during employment to physical issues. The Tribunal found that the employer had enough information to mean that it should have made further enquiries and therefore concluded that it had constructive knowledge of A’s disability. However, the EAT disagreed. It confirmed that there are two parts to the test: (1) what might a reasonable employer be expected to have done and (2) what might it reasonably be expected to have known as a result. In A’s case, had the employer made further enquiries, the Tribunal had concluded that Z would still have concealed her condition. Accordingly, A could not reasonably have been expected to know that Z was disabled.
Why this matters?
At first glance, this is a helpful case for employers. However, it is potentially dangerous to rely too heavily on this decision. The facts in the case are relatively extreme in that Z had expressly concealed her disability on a number of occasions. Generally, if an employer is on notice that an employee may be suffering from a mental health condition, it would be dangerous not to make full enquiries as in many cases, it is likely that a Tribunal will find that both stages of the test are met. Given the increased awareness of mental health conditions, it is increasingly likely that constructive knowledge would be found.
A Limited v Z
Covert recording of meeting by employee not necessarily a breach of trust and confidence
The covert recording of meetings by employees is an issue which employers are increasingly facing thanks to advances in technology. Evidence which has been obtained via a covert recording will generally still be admissible in Tribunal proceedings provided it is considered to be relevant. However, making a covert recording in the workplace can also potentially amount to misconduct. In Phoenix House Limited v Stockman, the employee secretly recorded a meeting in which she was warned she faced disciplinary action. When she was dismissed, she brought an unfair dismissal claim and a claim for whistleblowing detriment and race discrimination. Elements of her claim were upheld by the Tribunal and the EAT. One aspect of her claim which has now been considered by the EAT is whether her compensation should be reduced to zero on the basis that, had the employer known about the covert recording, it would have dismissed her for gross misconduct.
The Employment Tribunal considered this point at first instance and concluded that her compensation should be reduced by 10% to reflect this conduct. On appeal, the EAT held that the Tribunal had made a legitimate assessment of the facts and declined to make a further reduction. In doing so, it considered the legal framework around reductions in compensation, and also analysed the status of covert recordings. This analysis gives employers some useful practical guidance. In particular, the EAT, noted the following:
- Covert recordings by an employee will generally amount to misconduct but not necessarily gross misconduct;
- The intention behind the recording is relevant, for example here the employee made the recording because she was distressed and did not make any use of it. The outcome may have been different if she had recorded and misused confidential confirmation or made the recording to entrap the employer;
- The employer’s attitude to covert recordings will be a relevant factor in assessing what action would have been taken. The EAT noted that it was not listed as an example of gross misconduct in the employer’s disciplinary policy and that the employer had not updated its policy to include it by the point of the hearing.
Why this matters?
Although in this case the behaviour was not found to amount to a breach of trust and confidence, the guidance given is useful. A particular point to note is the suggestion that at if an employer strongly believes that covert recordings amount to gross misconduct, it is advisable to include this expressly as an example of gross misconduct in a disciplinary policy. Practically, it is also worth employers stating at the beginning of a hearing that the employee is not permitted to make a recording, so that the employee is given notice that the conduct is considered to be unacceptable.
Phoenix House Limited v Stockman
Round up of other developments
National Insurance Contributions: The National Insurance Contributions (Termination Awards and Sporting Testimonials) Bill, which we reported on last month, has now received Royal Assent. With effect from April 2020, it introduces a Class 1A NICs charge on termination payments which are taxable under section 403 of ITEPA 2003. As with income tax, the first £30,000 of such termination payments will be exempt.
Extending redundancy protection: Following the Women and Equalities Select Committee’s response in May 2019, BEIS has now published its own response to its consultation on the extension of redundancy protection for new mothers. The response confirms that the Government intends to extend redundancy protection so that it applies from the point the employee notifies her employer of her pregnancy and continues until six months after her return to work. Similar protection is proposed for employees returning from adoption or shared parental leave but not from paternity leave given its shorter duration. As yet, there is no proposed timetable for these amendments and it seems possible that they will be progressed together with any changes arising from the consultation on confidentiality clauses in workplace sexual harassment.
Government response to consultation on use of confidentiality clauses for workplace harassment and discrimination cases: The Government has also issued a further response on the consultation on possible measures to prevent the misuse of confidentiality agreements in relation to allegations of discrimination or harassment in the workplace. Responding in part to the report published by the Women and Equalities Select Committee in June 2019, the Government recognises that confidentiality clauses or “NDAs” can serve a legitimate purpose but proposes legislation to limit their misuse. The proposals do not go as far as the Select Committee report recommended and no timescale is given for the new legislation.
Off-payroll working rules in the private sector: The draft Finance Bill 2020 has been published. It contains legislation which extends the public sector off-payroll working rules to the private sector. These are intended to come into force on 6 April 2020.
