Non-compete clauses

A non-complete clause is just one of the restrictions employers add into employment contacts in an attempt to protect their legitimate business interests when employees leave their employment. Other restrictions include non-solicitation, non-dealing and non-poaching.

When drafting any restrictive covenants, it is imperative that the employer reviews exactly what business interests they need to protect, how that protection could be put in place and for how long it is needed.

Different industries and roles will require different types of restriction; there is no one-size-fits-all, which is where employers can sometimes become unstuck by simply applying the same restriction drafted into a template contract to both junior and senior members of staff. Any such restriction in that case is likely to come under scrutiny and be challenged as being invalid.

Businesses do have interests which they of course wish to protect e.g. confidential information, business connections and key members of staff and, in applying restrictions to its employees, it provides a means to do so. However, restrictions have long been challenged as being a restraint of trade and there is a lot of case law where employees have sought to challenge that the restriction was too long in term length, too geographically wide, would not have been reasonable at the time of engagement (even if it was reasonable at the time the contract terminated) and ultimately went so far that it restricted the employee’s ability to carry out work that is was skilled and qualified to do.

In 2016, there was consultation to reform restrictive covenants however no change was made as it was deemed that restrictions were vital in protecting legitimate business interests and did not unfairly prejudice with a lot of employees losing their jobs and/or looking at alternative avenues of employment and setting up in business for themselves. There has been a call to review non-compete clauses again and in December 2020, the government begun consultation to reform non-compete clauses in an attempt to maximise opportunity for individuals to start up in business for themselves with the following reforms being proposed:-

Option 1: Making non-compete clauses in contracts of employment enforceable only where the employer provides compensation for the period that the clause prohibits the individual from working for a competitor or starting their own business. Such a step could be accompanied by the following complementary measures:

• An obligation for employers to disclose the exact terms of a non-compete clause in writing prior to the start of the employment relationship.
• A statutory limit on the duration of a non-compete clause.

Option 2: Banning non-compete clauses altogether.

On 2^nd March 2022 the Government confirmed that it was still analysing the data from that consultation which had now closed and would be providing an outcome “in due course”.

While we await the outcome, we would remind businesses to be extremely cautious in their approach to implementing post-termination restrictive covenants. A restriction documented and signed by both parties does not mean it is legally valid and enforceable. There is a very fine line between how far a business needs to go to genuinely protect its business interest versus taking that step too far and restraining trade. Business need to ensure that they can, where possible, provide evidence in support of the decisions made in connection with the restrictions imposed.

Should you require further advice in connection with this article, the drafting of employment contracts or indeed any other employment related matter please do not hesitate to contact us.