Non-compete clauses in the government spotlight: is a ban in the pipeline?

Written on 25 Apr 2016

The government has launched a call for evidence asking for views on “non-compete” clauses which, on the termination of an employment relationship, seek to prevent a former employee competing against his or her former employer for a certain period. (See here)

The call for evidence has arisen in light of suggestions that such clauses can hinder start-ups from hiring “the best and brightest” talent, forming a barrier to innovation and employment.

So will we see such clauses banned?

The call for evidence merely seeks to identify whether or not such clauses stifle “opportunities to innovate and grow”. An outright ban is not at this stage suggested. Any legal developments in this regard are, in any case, likely to be a way off. This is simply a call for evidence; it will be the results of this which will determine whether or not the government pursues any statutory legal restrictions on the use of such contractual provisions.

However, it seems unlikely that tackling non-compete clauses in employment contracts on their own will positively impact on innovation and entrepreneurship.

How non-competes are enforced by the courts

Non-compete provisions will only be enforced by the courts so far as they are reasonably necessary to protect legitimate business interests. As such, only those non-competes which are narrowly drafted and are really necessary to protect a former employer’s business are likely to withstand the rigorous scrutiny of the courts. Indeed, because of this very difficultly, many employers rely on a package of measures to protect their business, often allowing a former employee to work for a competitor, but prohibiting them from soliciting customers and suppliers, and from poaching former colleagues. All of these restrictions are subject to the same test – they must not go any further than is reasonably necessary to protect the former employer’s legitimate business interests if they are to be enforceable. The restrictions must be limited by factors such as duration and geographical scope and in most cases, should be limited to those customers or suppliers with whom the former employee had a direct working relationship with.

Employers may also make use of longer notice periods and garden leave provisions to circumvent any statutory restrictions on preventing employees competing post termination. It seems difficult therefore to pin any stifling of innovation and talent simply at the door of the non-compete clause.

The employment contract may be only part of the picture

The employment contract may also only be part of the picture in some cases. Individuals who are shareholders or former shareholders may well be subject to similar but distinct clauses in a shareholder agreement or sale and purchase agreement.

Reaction

It will be interesting to see what reaction the call for evidence receives. Indeed, as the small businesses that the government is seeking to encourage themselves grow and develop into future large employers – will they not be wanting to protect their valuable business interests – although only so far as is reasonably necessary?