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Non-Compete Clauses

Planned Changes To Ex-Employee Non-Compete Clauses18th Dec 2020

by Hugh Reid on 18th Dec 2020

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Beware The Pitfalls

Employers depend on non-compete clauses to protect themselves when a key employee leaves to join a rival firm (or start their own business).

But this is an area of the law that is fraught with pitfalls. And the problem is about to get worse…

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Striking A Fine Balance

You may be tempted to write tortuously complex and onerous non-compete clauses into all your employment contracts – just to be safe. But this approach can backfire.

That is because non-compete clauses form part of common law. So they are decided on a case-by-case basis. And if you make your clauses too draconian then the court will simply throw them out. Your clauses must strike a fine balance between your needs and those of the employee concerned.

Preventing somebody from earning a living in their chosen trade or profession doesn’t just affect them: it means they are less able to support their family. Or generate wealth for the nation in the form of tax.

So the presumption in law is one of unenforceability (putting employers/ex-employers on the back foot). Non-compete clauses will be ruled unenforceable unless they are reasonable. They must:

  • protect the legitimate business interest of the ex-employer
  • be no wider than reasonably necessary to protect that legitimate business interest.

And the onus is on you, the ex-employer, to prove reasonableness in both these respects. So you’re already playing into a headwind. And now the goalposts are about to move again…


What The Government Is Planning

As Britain faces up to a record £2 trillion national debt, the government is planning to ease the rules on non-compete clauses. It fears the existing rules could stifle enterprise, job creation and wealth/tax generation.

That does not bode well for employers seeking to protect their businesses from employees who decide to move to a rival company or go it alone.

The government has just released a consultation paper on measures to reform post-termination non-compete clauses in employment contracts. This is what the consultation contains…
 

Option 1: Mandatory Compensation 

Officials are “particularly interested” in views on an option to make these clauses enforceable only when the employer provides compensation during the term of the clause.

This is similar to the law in France where employers enforcing non-compete clauses must pay their employees a non-derisory amount of compensation.

It’s a deterrent; the message to employers is blunt: write non-compete clauses into your contracts only if you’re serious about them – because you’re going to have to pay for the privilege. It’s a classic case of ‘grab employers by their wallets and their hearts and minds will follow’.

Here is the government’s precise wording on the idea of mandatory compensation: “It would create a financial disincentive to the use of non-compete clauses ‘as standard’ in contracts of employment and reduce misuse of non-compete clauses.”

The idea of compensation is nothing new though. Some employers already pay compensation voluntarily for the period of a non-compete clause. ‘Gardening leave’ is another popular option.

And the government is also considering complementary measures. They include:

  • enhancing transparency where non-compete clauses are used (to give employees a better idea of what they’re signing up to)
  • putting statutory limits on the length of non-compete clauses (courts currently enforce clauses up to 12 months).

Officials are trying to sweeten the mandatory compensation pill by saying it could lead to less litigation. But that’s cold comfort when your best employee has just walked out the door and is now your rival.

And the alternative is even less palatable…


Option 2: Banning Non-Compete Clauses Altogether 

The government is considering “whether making all post-termination, non-compete clauses in contracts of employment unenforceable is a necessary step to boost innovation and competition.”

Officials point to the hotbed of digital innovation in California (where non-compete clauses are void, regardless of how reasonable they might be) and entrepreneurship in Israel (where non-compete clauses are limited).

The government’s approach is as obvious as a sledgehammer. Presumably, one is meant to infer ‘accept Option 1…or we’ll bring in Option 2’.

Not so much carrot and stick. More like little stick and big stick. And the law is already sticking it to employers with the presumption of unenforceability.

So what’s the solution? We’ll all need to see how much of this consultation comes to pass and how severe the consequences will be.

The consultation does not close until 26 February 2021 (giving all the relevant stakeholders the chance to have their say). Expect numerous and frequent changes before any final papers are set down. It’s definitely a case of ‘watch this space’…

But in the meantime we recommend that you seek expert legal advice and check your employment contracts. It is always good practice to review them regularly to ensure they are keeping pace with the latest changes in the law.
    

Get Expert Legal Advice

When was the last time you reviewed your employment contracts? Contact Coles Miller employment solicitor Hugh Reid for expert legal advice.