The Government is currently consulting as to whether the law surrounding this type of post-termination restriction should be changed.
The consultation will specifically consider:
- Proposals to make non-compete clauses enforceable only when the employer provides compensation during the length of the restriction and whether this could be complemented by additional transparency measures and statutory limits on the length of non-compete clauses; and
- An alternative proposal to make non-compete clauses in contracts of employment unenforceable.
What are non-compete clauses?
Non-compete clauses are used in employment contracts to restrict an individual’s ability to work for a competing business for a defined period after they leave. The enforceability of such restrictions in practice can be problematic. These clauses usually restrict an employee for between 3 to 6 months after their employment has ended but can be longer for senior individuals.
Many employees will not start employment with a new firm thinking about what will happen when they leave. Consequently, many will sign an employment contract without fully considering the restrictions which may apply to them on their exit from the business. It can also be difficult to have a negotiation about post termination restrictions upon receipt of a job offer, out of fear that this sets the employment relationship off to a bad start.
Issues then arise when employees learn that they are restricted from working for a competitor for up to 6 months after their employment has ended. This can be problematic, particularly when job searching in the aftermath of the COVID-19 pandemic.
Are non-competes necessary?
These restrictions may be necessary to protect legitimate business interests but sometimes it can be difficult to see where this business interest lies. This begs the question of whether they are really necessary and whether is it fair to restrict an employee from working, particularly in the current job climate.
We often see situations where employers include a non-compete, knowing full well that it may not be enforceable but believing that the restriction may act as a deterrent in any event. This reliance on employees possibly being unaware of their rights certainly seems unfair.
Arguably employers can rely on other restrictions in order to protect their interests. For example, most employment contracts include confidentiality obligations, which continue to apply post termination. These provisions usually prohibit employees from sharing any confidential information obtained by virtue of their employment and/or any trade secrets with a future employer.
Employers can also rely on other types of post-termination restrictions to protect their interests. Enforceable non-solicitation and non-dealing clauses will prohibit employees from proactively contacting and/or dealing with clients or prospective clients for a certain period after their employment has ended. There can also be restrictions which prohibit employees from interfering with supplier relationships and/or poaching key employees.
Employers also have the option of placing employees on garden leave. This essentially means that although still employed, the employee is unable to work during their notice period. This has the same effect of removing the employee from the job market for a certain period of time and due to the potential risk of restrictions being unenforceable, garden leave can be seen as a safer option for employers.
Is there a middle ground?
The value of non-compete clauses for employers can be in knowing that the confidential information an employee has gained access to during their employment, will be out of date and/or less business critical by the time the restricted period has come to an end and the employee begins employment with a new employer. The length of the restriction should mirror the “shelf life” of this information in order to improve enforceability prospects.
In these circumstances i.e. where a non-compete is necessary to protect an employer’s legitimate business interests, it would seem to be fair for an employer to have to compensate the employee during the restricted period, in order to reflect the fact that they are prohibited from working and are unlikely to have an income during this period.
Have your say
The Government consultation regarding non-compete clauses closes on 26 February 2021 and you can have you say via the following link:
If you have any questions in relation to this article, post-termination restrictions or Employment law generally, please do not hesitate to contact a member of the Employment team at Bishop & Sewell LLP who will be happy to assist you.
The above is accurate as at 22 January 2020. The information above may be subject to change during these ever-changing times.
The content of this note should not be considered legal advice and each matter should be considered on a case by case basis.