The High Court has recently answered this question.

Background

In this case, Ms Tillman was recruited into a junior role with a view for her to be swiftly promoted within the business. She signed a contract of employment which set out a number of restrictive covenants including a six-month non-compete clause.

On termination of her employment, Ms Tillman was carrying out a more senior role. However she had not signed new restrictive covenants.

She argued that the covenants should no longer be enforceable against her, such was the difference in her role.

However, the High Court in this case upheld the six-month non-compete clause that Ms Tillman had originally signed as a junior employee, finding that it went no further than reasonably necessary to protect the legitimate business interests of the employer.

The court looked at the parties’ expectations at the time of contracting and as it was in the parties’ contemplation that Ms Tillman would eventually have a significant level of client engagement and involvement with strategic matters, the six-month non-compete clause was deemed to be justified.

Implications

The correct approach to determine whether or not a restrictive covenant within an employment contract is lawful and enforceable is to consider what the parties’ expectations were at the time of contracting.

If a covenant is unreasonable at the time an employee enters into the restrictive covenant, it cannot be saved simply because a subsequent change of circumstances means that it would have been reasonable at the time of enforcement. The subsequent change of circumstances would need to be contemplated by the parties’ when entering the contract for it to be justified, such as in this case.

To avoid any potential disputes, employers are advised to ensure that junior employees moving into senior roles sign new restrictive covenants. This is particularly important where the parties did not envisage this progression to take place when initially commencing the employment relationship.

Published in…

Updates: For employers: Contract changes | Contracts and incentives |
Tagged with: Contracts of employment |

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