Non-compete clauses to be limited

Non-compete clauses are often found in a document called a restrictive covenant. The purpose of all elements within the document is to restrict an employee’s economic activity for a defined period when they leave your organisation.

These documents are considered a valid measure for businesses who are seeking to protect their interests: their client lists; their existing talent; their sales strategies; their trade secrets etc to name a few.

They are seen as more of a commercial agreement and enforcement of a breach by an ex-employee will be done through the civil courts. There are no specific laws which govern the use of restrictive covenants other than the concept of ‘reasonableness’. The application of the document cannot be deemed a “restraint of trade”; an unreasonable limitation on the employee attempting to earn a living once they have left their previous job.

There are four principal types of covenant:

• Non-compete clauses stop the employee from working for a competitor for a specified period of time in a specified geographical area, or from setting up business as a competitor.
• Non-solicitation clauses prevent employees from soliciting the business of clients or customers of a former employer. However, they do not prevent an employee from working with a former client or customer if that client or customer makes contact directly with the employee.
• Non-dealing clauses stop the employee from both soliciting clients or customers of a former employer and also dealing with the clients or customers. These are more comprehensive than non-solicitation clauses because they cover the employee engaging with any activity with former customers or clients for a specified period of time, regardless of who makes the first contact.
• Non-poaching clauses prevent employees from encouraging former colleagues to leave the employer and join them in their new organisation.

What’s happening with non-compete clauses?

The Government has announced it will bring in new legislation limiting the application of a non-compete clause to a maximum time period of three months. No other element of a restrictive covenant mentioned above will be affected.

The Government also considered banning non-compete clauses but decided to stop short of this measure.

Why has the Government done this?

This is an attempt to build on measures already taken to make Britain the "most dynamic place to work in the world", based on a high-skill, high-wage economy. This is to be achieved by increasing the amount of flexibility in the labour market, boosting opportunities for businesses to start-up, grow and create jobs.

To deliver this, the Government wants to make it easier for individuals to start new businesses, find new work and apply their skills to drive economic growth.

Non-compete clauses are seen as a barrier that prevent individuals from working where they want to or applying their entrepreneurial spirit to a competing business. The Government found that non-compete clauses were used in both highly paid and low paid roles and lasted anywhere between one month and 24 months.

What should employers do?

• Employers should review the limits they apply to employees on working for a competitor or setting up their own businesses which would be a competitor. Anything more than three months will need to be changed if these proposals are implemented.
• The inclusion of garden leave in a contract of employment should be considered. This enables employers to require an employee working their notice not to come to work, but they are unable to work anywhere else because they are still employed by you.
• Longer notice periods may also serve a purpose when used with garden leave, so employers may wish to consult to increase employee’s existing notice periods, or implement longer ones with new employees.