The end of the road for employment contract non-compete clauses?

July 12, 2016

The Department for Business, Innovation & Skills (BIS) is reviewing the use of non-compete clauses in employment contracts, which it is concerned may hinder growth and innovation. Businesses across the UK were asked to submit their views as part of a nationwide innovation plan focused on promoting entrepreneurship.

How do non-compete clauses work?

The type of non-compete clause covered by BIS’s review is wide and includes traditional non-compete, non-solicitation (of employees) and non-dealing (with customers) clauses. Such clauses typically restrict employees, for a period after their employment terminates, from:

  1. Making contact with customers or clients with a view to obtaining their business.
  2. Contacting employees to induce them to terminate their own contracts.
  3. Joining or starting up a competing business.
  4. Carrying out specific competing activities within a defined area (i.e. setting up a business in competition in the local area).

Such restrictions are typically imposed on senior employees, directors and partners or members, but they can be imposed on consultants and casual workers in some circumstances. Any restriction must be drafted carefully and tailored to the employee.  To be enforceable, each clause must protect a legitimate business interest, and go no further than is reasonable and necessary to protect that interest (in terms of scope e.g. period of the restriction). There is no set formula for calculating a legitimate interest, or for working out what is a reasonable level of protection for a business.  The enforcebility of non-compete clauses are determined by the Courts on a case by case basis, bearing in mind all of the facts, including the nature of the employer’s business and the employee’s position in it.

What is their purpose?

Such clauses are designed to prevent departing employees damaging something that legitimately belongs to a business, such as trade connections (customers, clients, suppliers), goodwill, trade secrets and other confidential information, and workforce stability. Departing employees are often well-placed to take advantage of such knowledge for the benefit of their new employer, or to set up a rival business.

What is their impact?

Non-compete restrictions may significantly reduce an individual’s ability and freedom to earn a wage from their skills, experience and qualifications within their industry. Enforceable restrictions will (subject to how they are drafted) prevent an individual earning from their trade, working in a particular city or region, or exploiting their own contact networks, for a specific period of time. It is for that reason that Courts take a careful approach to enforcing such restrictions, to ensure that the scope of the restrictions being enforced is reasonable and necessary.

Naturally, departing employees can be dismissive of such clauses (and the prospects of their employer enforcing them). However, that attitude can be costly. The number of High Court injunction cases (enforcing non-compete restrictions) has risen in recent years, showing that businesses are prepared to defend their interests vigorously if necessary.

What is the concern?

Businesses often have legitimate interests to protect from exploitation by former employees. However, the contrasting view (one for which the Government may have some sympathy) is that such clauses prevent companies from hiring the best and brightest talent, thereby acting as a barrier to innovation, trade and employment. Specifically, in July 2014, the Social Market Foundation (a think tank), wrote a report which recommended that the Government consider banning non-compete clauses from employment contracts.

Overall position

As non-compete clauses are designed to be a restraint on an individual’s ability to trade and to earn, their consequences can therefore appear severe. In individual cases, enforcement can therefore be hotly disputed.

Overall though, it is hard see why banning or restricting the use of non-compete clauses is necessary. The Courts carefully scrutinise each non-compete clause that they are asked to decide on, to ensure reasonableness based on the relevant set of facts. Furthermore, the Courts have the benefit of many years worth of case law to guide them. It is a process that allows the Court to adapt to each employee/employer relationship before them – flexibility that seems to work. Any legislation that the Government introduces to change the current position (perhaps introducing more black/white rules to enforceability) may have negative unintended consequences.

Nonetheless, the Government’s decision to invite views, ideas and opinions on this subject has certainly set a ball rolling, and the outcome will be one to watch in the coming months.

More information can be found here. If you require more information about the contents of this article, or if you are a business, or an individual who may be affected by such clauses and require advice on how to protect or enforce your rights, please feel free to get in touch with Jonathan Bruck, who will be happy to explain the implications to you, or direct you to someone who is able to assist.

The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.

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