Why Is It Important to Review Contracts of Employment on Promotion?
When an employee is promoted, it may not be just their job title and salary that needs to be updated.
For example, if they are going to have more contact with clients or confidential information, it may be that new restrictive covenants need to be imposed, or existing covenants reviewed.
In the recent case of Egon Zehnder Ltd v Mary Caroline Tillman the High Court has provided some useful insights into how restrictive covenants will be interpreted when an employee has been promoted several times but their original contract has not been updated.
The Facts
Mrs Tillman joined Egon Zehnder Ltd (EZ), an executive search company, in January 2004. She had previously worked as an investment banker, where she gained a good reputation, and was recruited by EZ to work as a consultant in their financial services group.
Her starting salary and guaranteed bonuses were higher than most consultants as she was expected to be a rising star. This turned out to be true and by January 2009 she had been promoted to Partner. She later became Global Head of Investment Banking and co-Global Head of the Financial Services Practice Group. However, despite her rapid rise through the organisation, she did not sign a new contract upon any of these promotions.
In late January 2017, Mrs Tillman handed in her resignation notice and EZ subsequently terminated her contract with immediate effect and paid her in lieu of notice. On 1 May 2017, Mrs Tillman notified EZ that she wished to start working for a firm in New York that carried on similar business. EZ sought to apply for an injunction on the basis that Mrs Tillman would be in breach of the six-month non-compete clause contained in her employment contract, which she had entered into at the beginning of her employment in 2004. However, Mrs Tillman sought to argue that the non-compete clause had been unenforceable when the parties entered into it at the start of her employment, alleging in particular that it went further than was reasonably necessary in light of her original duties as a 'consultant'.
The Tribunal's Decision
The High Court agreed that it was right to determine the validity of the restrictive covenants by reference to Mrs Tillman's initial status as a consultant. The reasonableness of a restrictive covenant had to be assessed at the time it was entered into.
However, the Court added an interesting gloss to this basic principle. It is also legitimate to take into account the fact that an employer may have been grooming an individual for promotion and, as a result, that individual may have had greater access to clients and confidential information than would otherwise have been expected.
The result of this for Mrs Tillman was that the restrictive covenants were enforceable against her. Had she not been tipped for the top at the time of her recruitment the restrictions may have been too widely drawn, and therefore not enforceable.
Best Practice
This case provides a useful summary of the existing rules where an employee has not entered into new restrictive covenants upon a significant promotion. While this case will not assist employers seeking to enforce historic covenants entered into when the parties had no contemplation of any future promotion, it may be helpful for those employers who can show that they recruited an individual with the clear expectation of preparing them from the outset for a more senior role.
However, employers are advised to ensure that their restrictive covenants are appropriate to the role into which an employee is recruited and to always consider requiring an employee to enter into new restrictive covenants upon a promotion if the existing restrictions would no longer be adequate.