Government to investigate non-competition clauses

19 May, 2016
by: Cripps Pemberton Greenish

Different ways - EmploymentIn a move designed to back innovation and entrepreneurship across the country, the UK government has announced plans to investigate employment rules that it considers could be stifling small businesses and entrepreneurship and preventing employees from starting up their own business after leaving a job. The government has launched a ‘call for evidence’ to assess the impact of non-competition clauses in employment contracts. Businesses are asked to give their views on whether they consider non-competition clauses to be an unreasonable commercial hindrance or a positive contractual protection.

Are non-competition clauses reasonable?

Your view is likely to change depending on whether you are in the employer’s or employee’s shoes. An employee may consider that an employer is abusing their position by restricting their employees from working for a competing business for a set period of time, usually 6 to 12 months. An employee’s skills may be such that this severely restricts their ability to work during that period, let alone set up in competition. The employee’s business knowledge, customer base or client contacts will quickly decay if not put to use in the immediate period following their departure – indeed this is the point!

The English Courts have a long-established track record of limiting, amending, and even striking out non-competition clauses that are deemed unreasonable. They are generally quite hard to enforce. More broadly, Post Termination Restrictive Covenants (PTRCs) are only enforceable if they:

1. protect a legitimate interest; and
2. the scope and duration of the protection sought is reasonable.

PTRCs in employment contracts are already subject to greater scrutiny by the courts than those in commercial contracts due to the difference in the bargaining positions of the parties when entering into the contracts. It is however a matter of balancing the interests of each party and PTRCs should go no further than is necessary to protect an employer’s legitimate business interests.

It is difficult to see how banning the use of non-competition restrictions will generate innovation. An employer that has invested time and money into an employee that is then allowed to leave and immediately compete has lost any chance to protect its business from that competition. Often employers use PTRCs as a deterrent to slow down an employee who is considering competing whilst it puts in place measures to protect its business. Legal action is less common but a necessary protection for example when a team decide to move to a direct competitor or set up on their own. The impact on an employer’s business of such a move could be substantial and therefore employers should be able to take legal action if necessary.

It is not clear at this stage whether the focus is just on non-competition clauses or if it goes further to look at PTRCs in general. This would include clauses such as the non-solicitation of customers and employees.

The deadline to provide evidence is Sunday 22 May 2016 and we shall watch with interest to see what (if any) actions will be advised.