* indicates required

Test loosened for restrictive covenants in employment contracts

By Jennie Jahina

Wilson Browne Solicitors

RESTRICTIVE covenants, a clause in a contract that restricts an employee from certain activities once they leave an employer, have been used extensively in employment contracts. For a hundred years or more courts have ruled that those which are drafted too widely will be unenforceable.

This was the case even if only a small element of the clause was unreasonable. The only limited exception to this was if the right to severance, whereby the contract was terminated early, could be used in the employer’s favour.

In a surprise decision, the Supreme Court has recently departed from this approach instead preferring a new test of enforceability.

The new test requires the following three questions to be asked:

1. Is the unenforceable provision capable of being removed without the need to add or modify the remaining wording?

2. Will the remaining terms continue to be supported by adequate consideration? and

3. Will the removal of the provision generate any major change in the overall effect of the restraints?

Of the three, the third is key.

This decision has loosened the severance test for restrictive covenants significantly and it makes it hard to think of examples where the ‘no major change’ test would prevent words from being severed.

Potentially, this decision could see employers including more onerous restrictions in contracts, safe in the knowledge the courts can remove the unreasonable parts to allow enforcement. This could make it harder for employees to argue a restriction is too wide to be enforceable. But before employers start re-drafting, there is a very real risk that, due to inferences in the decision, it may prove extremely costly for employers to rely on the new test for severance as an enforcement tool, rather than continuing to draft reasonable and proportionate restrictions.

For more information, contact Wilson Browne Solicitors on 0800 088 6004 or visit www.wilsonbrowne.co.uk

More legal articles: