Are You Too Interested In Your Former Employees' Post-Termination Restrictions?

We are often asked to review employment contracts, including post-termination restrictions. It is increasingly common to see covenants that impose some form of restriction on the amount of shares an employee can hold or "be interested in" for other companies whilst they are still an employee. There is no problem with such clauses.

We also see a number of post-termination restrictions that either restrict the former employee from holding "any interest" in a competing business, or limiting the amount of shareholding that they can have. If your employment contracts use this language then this could lead to the entire restrictive covenant being unenforceable.

As a reminder, the legal position in relation to restrictive covenants in Guernsey and Jersey is very similar. Restrictive covenants are a restraint of trade and therefore they are unenforceable as a matter of public policy, unless the covenants protect a legitimate business interest and the covenant is no wider than necessary to protect that interest. The applicable principles in both islands are also comparable to those in England and, in the absence of local judgments, the Jersey courts will look to decisions from England (CPA v Keogh [2015] JRC091) and the Guernsey courts are likely to do the same. As a result, English decisions on restrictive covenants are likely to be persuasive in the courts in both islands.

A recent English Court of Appeal decision, Tillman v Egon Zehnder Limited [2017] EWCA Civ 1054, highlights the need to carefully consider how these clauses are drafted. The employer in this case was unable to enforce the restrictive covenants, and also ended up having to pay the former employee's legal costs. In this case there were two relevant restrictions:

"You shall not, during the course of your employment, directly or indirectly, hold or have any interest in, any shares or other securities in any company whose business is carried on in competition with any business of the Company or any Group Company, except that you may hold or have an interest in, for investment only, shares or other securities in a publicly quoted company of up to a maximum of 5 per cent of the total equity in issue of that company"

"You shall not without the prior written consent of the Company directly or indirectly, either alone or jointly with or on behalf of any third party and whether as principal, manager, employee, contractor, consultant, agent or otherwise howsoever at any time within the...