'At the start of employment, employers often include restrictions, known as restrictive covenants, on what an employee can do with information and contacts gained during their employment,’ says Frances Woods, Partner and Head of dispute resolution. ‘However, even if a former employee could damage your business, there are limits on the restrictions that can be placed on them and how far you can prevent them from competing with you.’
Frances explains non-compete clauses, when they are binding, and looks at proposed changes and how employers could deal with these changes.
What are non-compete clauses?
Non-compete clauses are one of a range of restrictive covenants that employers often include in a contract of employment. A non-compete clause is a wide prohibition on the departing employee from working for a competitor or setting up in competition with you. The restriction is for a specified time after leaving your business and may also only apply within a specific geographical range, but depending on the type of business this may not be relevant.
When are non-compete clauses binding?
Courts will only enforce a non-compete clause if it is appropriately worded and reasonable. Otherwise, it is treated as a restraint of trade which unreasonably restricts your former employee from taking up new opportunities. This would not be enforced by a court as it is seen as anti-competitive.
When deciding whether or not the clause is binding, the court will consider the duration, any geographical range, and the type of activity. These will be considered in the context of the interests you need to protect, the nature of your business, typical restrictions used in the sector, and the information and contacts the employee has gained.
To increase the likelihood of it being binding, the restriction should be as narrowly drafted as possible. This may mean being very specific in the wording describing the type of business with which the employee should not compete.
To be enforced by a court, the effect of the clause must not go beyond protecting your legitimate business interests, such as valuable client connections. The restriction could well prevent the individual from working in their chosen profession for a limited time, so the employer must be able to show the potential detrimental impact on the business if the restriction is not enforced.
What are the other options to protect your business?
A non-compete clause has a significant impact on the individual. A court may not enforce it against a former employee if a more proportionate restriction would give similar protection. Other restrictions include:
non-solicitation - not approaching or actively contacting former clients or suppliers to start a business relationship on behalf of a competitor;
non-dealing - not dealing with a former client or supplier, even if they initiate contact with the former employee rather than the individual connecting with them; and
confidential information - not misusing or disclosing confidential information belonging to your business.
Another option, which can be used in conjunction with restrictive covenants, is to include a long notice period with the flexibility to put the employee on garden leave during some or all of the notice period. Garden leave clauses can give you options; preventing the employee from working at all or restricting their activities and contact with key clients during the notice period. This allows confidential information to go out of date and client relations to cool, reducing the damage if they go to work for a competitor. Garden leave clauses must also be reasonable to be enforceable.
Will the law change?
In recent years, the Government has carried out a couple of consultations relating to non-compete clauses, driven by a concern that these hinder entrepreneurship. In May 2023, the Government announced that it would change the law so that non-compete clauses could not last any longer than three months. There is currently no date for these changes to be implemented.
How can I protect my business if the law changes?
If you usually ask employees to sign up to contractual restrictions lasting longer than three months after they leave, the announced change in law would only affect non-compete clauses. To pre-empt this potential change, contracts being agreed now can also include other restrictive covenants, such as non-solicitation clauses along with garden leave and effective confidential information provisions.
How we can help
We can advise you and write enforceable provisions to protect your business when an employee leaves. We can advise you on whether or not existing contractual provisions are likely to be binding on the employee at the time they depart, or the risks of taking on an employee whose restrictive covenants from their last job are still potentially enforceable.
For further information, please contact Frances Woods or a member of the dispute resolution team on 01905 721600 or via email worcester@parkinsonwright.co.uk
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.