Introduction
Types of restrictive covenant
Use of restrictive covenants
Potential impact of legislation
Comment


Introduction

The government recently called for evidence on non-compete clauses and their impact on innovation in the United Kingdom.

Non-compete clauses are a specific type of restrictive covenant which prevent an individual from competing with a former employer for a fixed period. These provisions are enforceable only if they protect a legitimate interest and are reasonable in scope and extent.

The government is taking action in response to suggestions that non-compete clauses can hinder start-ups and prevent them from hiring the best talent. The call for evidence asked businesses and individuals to provide feedback on whether these provisions are acting as a barrier to innovation. Depending on the results from the survey, the government could look to introduce new policies as part of its National Innovation Plan.

Types of restrictive covenant

There are many different types of restrictive covenant in addition to non-compete clauses, including:

  • non-poaching clauses, which prevent a former employee from hiring other employees;
  • non-solicitation clauses, which prevent a former employee from encouraging clients to move away from the employer; and
  • non-dealing clauses, which prevent a former employee from having any dealings with the employer's clients.

Other contractual provisions may also have the effect of preventing or reducing employee competition, such as long notice periods or express duties to act in the employer's best interests.

Use of restrictive covenants

Restrictive covenants are used across many different business sectors, as many companies are concerned about the potentially damaging effect of losing a key employee or even a team to a competitor, putting at risk their confidential information, clients, prospects and other staff. In practice, the most effective restrictive covenants are those that are tailored to the specific requirements of the business and the specific role that the employee performs.

The call for evidence suggested that well-drafted IP and confidentiality clauses may offer all the protection that a business needs, without requiring a non-compete clause. However, case law has recognised that workforce stability and customer and supplier relationships are also "legitimate business interests" worthy of protection, in addition to protection of confidential information. Thus, there may be circumstances in which those interests can be adequately protected only by the use of non-compete clauses.

Potential impact of legislation

The call for evidence acknowledges that legislating to restrict the use of non-compete clauses could have unintended consequences, as many businesses are attracted to working in the United Kingdom because of the level of protection offered to employers in the courts. The current law aims to strike a balance between the legitimate business interests of the employer and employees' right to earn a living. As a starting point, the courts will treat the restrictive covenant as invalid unless the employer can show that the restriction goes no further than is reasonably necessary to protect its legitimate business interests. Restrictions which are purely designed to prevent competition will not be upheld and the employer bears the burden of proving that the restrictions are valid.

Comment

Ultimately, whether respondents to the call for evidence are for or against placing limitations on the use of restrictive covenants is likely to depend on their current needs. In theory, all businesses could benefit from limitations on non-compete and similar clauses at the point they wish to recruit individuals from competitors. In addition, individuals themselves may benefit if unrestrained when leaving an employer to set up their own business.

Those same businesses would suffer, however, if they were prevented from using restrictive covenants when their own key employees leave. Start-ups could be hit hardest by curbing the use of restrictive covenants, as their confidential information and strategic plans are often of such vital importance that losing them to competitors could have a catastrophic effect on the business. Reform could thereby have the opposite effect to that intended by the government, by damaging innovation in the United Kingdom.

The government is now reviewing all of the responses to the call for evidence.