Is it time for a change when it comes to non-compete clauses?

As BEIS’s consultation on the use of restrictive covenants in employment contracts comes to a close, Jane Amphlett examines if there is a need for reform

There is a common misconception that non-compete clauses are not enforceable. It is true that post-termination restrictions on where an employee can work and which customers they can deal with can be contrary to public policy as a restraint of trade. But, in broad terms, they will be enforceable where the employer can show it has a legitimate interest to protect and the restriction goes no further than is reasonably necessary to protect that interest. 

The courts won't enforce a clause aimed at preventing competition altogether, but confidential information and customer and client connections, for example, can be protected by properly drafted and reasonable post termination restrictions. 

Of the post-termination clauses typically included in employment contracts, non-competes have the harshest impact on an employee, as they may prevent them working in their chosen field altogether. The courts scrutinise these clauses carefully and employers looking to enforce them need to provide persuasive evidence of why they are necessary (and why lesser restrictions, such as on soliciting and dealing with key clients, will not adequately protect the business). 

Claims to enforce restrictive covenants, including non-competes, are dealt with in the High Court and, although many claims are resolved by agreement, those that reach court are typically high-value and hard-fought. Frustratingly for employees and employers alike, court decisions about whether non-compete clauses are enforceable are highly fact-sensitive and depend on factors like the employee's duties, the sector and the nature of the confidential information and client relationships, which the employer is seeking to protect. 

This means that the outcome of a particular case can be difficult to predict, and many employees (and their new employers, if they don't have the resources for a legal fight) opt to comply with unreasonable clauses rather than face the huge legal costs, which these disputes entail. Arguably this creates a skewed market, with start-ups facing extra barriers to hiring experienced staff because they can't face the cash drain of litigation. 

It's perhaps unsurprising, therefore, that the government is looking at reform in this area as they look at ways to support businesses recovering from the economic impact of the current pandemic. 

The Department for Business, Energy and Industrial Strategy (BEIS) recently consulted on the use of non-compete clauses in employment contracts. BEIS looked at a number of options, including banning them altogether, restricting their duration and requiring the employer to pay the employee during the non-compete period. 

The stated goal is to remove barriers to innovation – the unenforceability of non-competes in California is often cited as a factor behind Silicon Valley's success. The government, therefore, may also be influenced by practice in other countries; for example, in France non-compete clauses can only be enforced where the employee is paid during the non-compete period. 

However, reform carries the risk of unintended consequences. If employers need to pay an employee their full salary during a non-compete period, many employers will opt for longer notice periods instead with the option to put the employee on garden leave. This would do little to promote innovation and healthy competition. 

The government consulted about similar proposals a few years ago but they ended up going nowhere. It remains to be seen whether any of the latest proposals end up on the statute books. 

Employers which use non-compete clauses should monitor the consultation's progress and consider what measures they would need to protect their business if non-competes became more heavily regulated. They should consider better-drafted restrictions on poaching clients after termination, tighter control of confidential information and stricter rules on use of personal devices for handling client communications. Whatever the outcome of the proposals, prevention is usually better than cure. 

Jane Amphlett is head of employment at Howard Kennedy LLP