Government announces intention to call for evidence on Non-Compete Clauses

29 April 2016

The government has announced its intention to call for evidence in relation to non-compete clauses. Non-compete clauses are a type of restrictive covenant which prevents individuals from competing against their former employer or working for a competitor for a set period of time following termination of employment. The government will seek evidence on the extent to which such clauses may stifle small businesses and entrepreneurship. This forms part of a larger drive by the government to make Britain the best place in Europe to innovate and start up new business. The government has also set up an Innovation Survey seeking views as to how the government can work with businesses to create new opportunities, improve services, drive growth and create jobs. The results of the call for evidence on non-compete clauses will feed into the government’s larger drive and its new Innovation Plan.

There is general concern amongst some organisations as to how non-compete clauses may be affecting the development of new businesses. For example, BIS has stated that non-compete clauses can hinder start-ups from hiring the best and brightest talent. Emma Jones, founder of Enterprise Nation, has also expressed concern about non-compete clauses and welcomed the survey, stating that ‘Entrepreneurial individuals need to be able to ease out of employment and into self-employment’.  

Although on first appearance restrictive covenants may seem anti-competitive in preventing employees from working for other businesses for a certain period, it is important to remember that restrictive covenants, such as non-compete clauses, are generally put into place to attempt to protect an employer’s business interests. Prohibiting the ability of employers to put in place restrictive covenants to restrict employees from moving across to a competitor immediately upon termination and bringing across their previous employer’s clients could equally be seen as stifling business, in that it removes the ability of employers to grow their business and then suitably ring-fence and protect it.

Furthermore, the court already takes the approach that restrictive covenants will be unenforceable as they are in restraint of trade, unless they go no further than is reasonably necessary to protect the legitimate business interests of the employer (such as confidential information, stability of the workforce and its client base) having regard, amongst other things, to the geographical applicability and length of the restriction. Thus, arguably, the court is already involved in appropriately balancing the competing interests involved.

On the other hand, it can be seen from a practical perspective that restrictive covenants have a deterrent value, in that an employee will often be wary of incurring time and significant expense defending an injunction application and faced with uncertainty as to what a court would decide and therefore may nevertheless be fearful that such a clause would be enforced by the courts, and thereby abide by restrictions which could potentially be unreasonable and unduly stifle business.

This said, in terms of implementing any changes, the current statement by the government in relation to the plans to call for evidence appear to be focused solely upon non-compete clauses. These clauses have typically been regarded as the most draconian of restrictive covenants as they keep an employee out of the workforce for a set period of time and therefore are difficult for an employer to justify. Employers have generally relied upon other types of restrictive covenants to adequately protect their business interests, such as non-solicitation or non-dealing clauses to prevent the employee having contact with their clients or employees post-termination, even if the employee does go on to work in competition.

If the government were to look to ban or limit the use of non-compete clauses, it is questionable how effective this would be if non-compete clauses were regulated in isolation, since other types of non-restrictive covenant still restrict the employee’s ability to carry out business post termination. Additionally, it is possible that other contractual clauses such as garden leave and notice periods could be utilised by the employer to the same effect as a non-compete clause. Thus, a developed consideration of the issues would need to give more attention to the use of restrictive clauses generally used by employers rather than simply non-compete clauses.

Further information

Should you have any questions about the issues raised in this blog post please contact a member of our employment team.

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