Andy Burnham recently announced that the Government is to “legislate to make sure that non-compete clauses will no longer be a barrier to hiring for our most promising start-ups and scaling firms”. But what does this mean, practically, for employers? The devil, as always, is in the detail – and there is currently precious little of that.
What are non-compete clauses?
Non-compete clauses are a form of “restrictive covenant”. Restrictive covenants are clauses in employment contracts that prevent former employees from engaging in certain competitive activities for a specified period of time after they leave.
Non-compete clauses are a specific type of restrictive covenant that prevent former employees from joining a competing business for a specified period of time. Other forms of restrictive covenants include clauses that prevent former employees from:
- soliciting or dealing with clients and customers;
- poaching or employing key employees;
- interfering with supplier contracts.
Under existing law in England and Wales, restrictive covenants are already presumed void as an unlawful restraint of trade. Restrictive covenants are only enforceable to the extent they are clearly worded (so any ambiguity will be construed against the employer) and do only what is reasonably necessary to protect legitimate business interests, such as confidential information or customer connections.
Non-compete clauses are the most draconian restrictive covenant because they prevent employees from joining a competitor altogether. This often leaves individuals unable to work at all for a period of time, if their skills and experience mean that they can realistically only find work with a competitor. For this reason, they are usually the most difficult to enforce, but their real power is in deterrence: few employees want to take the risk of testing them in court.
How will the ban on non-compete clauses work?
At the moment, we know precious little. There are many questions that the Government will need to answer before the ban is imposed:
- Will the ban apply to non-compete clauses only, or will it extend to other sorts of clauses that prevent former employees from soliciting or dealing with clients, and from poaching staff?
- Will it be a total ban, or will there be a cap on the maximum length of time that the non-compete restriction can last?
- Will the ban apply to employment contracts only? Will it also extend to share purchase and share option agreements, shareholder agreements, consultancy agreements, and/or partnership and LLP agreements?
- Will the ban catch all existing employment contracts, or only new ones entered into after a certain date?
What it will mean for employers
If other, lesser forms of restrictive covenants survive, these will assume greater importance. Employers will need to review their contracts to ensure that these are tightly drafted to increase the chances of enforceability.
Garden leave clauses will have more importance than ever. Paying someone to stay at home throughout their notice period keeps them out of the market without the need for a post-termination restriction. Employers will need to review their contractual notice provisions to ensure that they have a robust garden leave clause, and that notice periods are of sufficient length to protect their business.
So will confidentiality clauses. Employers will need to review these clauses to ensure that they properly identify confidential information requiring protection, and that they are robustly drafted and enforceable in the event of a breach of confidentiality.
Retention incentives will also have greater importance. Deferred bonuses and long-term incentive plans with leaver provisions and clawback clauses will serve as a “carrot” to encourage employees to stay.
How Arbor Law can help
As the Government develops its proposals on non-compete clauses, Arbor Law can help employers assess how well their existing contracts protect the business if the rules change.
That may involve tightening non-solicitation and non-dealing provisions, reviewing notice and garden leave arrangements, strengthening confidentiality protections and considering whether retention incentives should play a greater role.
The aim is to preserve appropriate protection for key relationships, information and people without relying too heavily on a form of restriction that may soon be curtailed.
FAQs
Are non-compete clauses being banned in the UK?
The Government has announced plans to legislate so that non-compete clauses are no longer a barrier to hiring for start-ups and scaling businesses. The detail has not yet been confirmed, including whether this will amount to a complete ban or a limit on the length of non-compete restrictions.
What is a non-compete clause in an employment contract?
A non-compete clause is a type of restrictive covenant that prevents a former employee from joining a competing business for a specified period after their employment ends. Other restrictive covenants can prevent former employees from soliciting clients, dealing with customers or poaching key employees.
Are non-compete clauses enforceable in England and Wales?
Non-compete clauses are currently presumed void as an unlawful restraint of trade unless they are clearly drafted and go no further than reasonably necessary to protect a legitimate business interest, such as confidential information or customer connections. Because they can prevent someone from working for a competitor altogether, they are generally among the most difficult restrictive covenants to enforce.
When will the ban on non-compete clauses come into force?
The Government has announced its intention to legislate, but no implementation date has yet been confirmed. Further detail is also needed on how the new rules will operate and which contracts and restrictions they will cover.
Will the non-compete ban apply to existing employment contracts?
That remains unclear. One of the questions the Government will need to answer is whether the new rules will apply to existing employment contracts as well as agreements entered into after the legislation takes effect.
Will non-solicitation and non-dealing clauses also be banned?
It is not yet known whether the proposed changes will apply only to non-compete clauses or extend to other restrictive covenants, such as non-solicitation and non-dealing provisions. If those clauses remain available, they are likely to become more important for employers seeking to protect customer relationships and other legitimate business interests.
What should employers do about non-compete clauses now?
Employers should review the protections in their existing contracts rather than waiting for the final legislation. That may include looking at non-solicitation and non-dealing clauses, notice periods, garden leave provisions, confidentiality protections and retention incentives to make sure the business is not overly reliant on non-compete restrictions.
