Earlier this year the UK government launched a "call for evidence" on non-compete clauses, as part of a drive to boost innovation. The government says it is concerned that the use of restrictive covenants in the UK may hamper the movement of talented staff, stifle innovation and hinder business start-ups. It refers to research in the US suggesting that limiting the use of these clauses has had a positive impact. One prominent think tank here has already called for the government to consider banning non-compete clauses in employment contracts.
Although (unlike in many other European jurisdictions), UK employers do not have to pay employees compensation during periods of post-termination restraint, there is a high hurdle for enforceability. Under established UK case law, in order to enforce a covenant an employer has to demonstrate to a court's satisfaction that it has a legitimate business interest to protect, such as:
- the need to safeguard confidential information, where a confidentiality clause on its own is not adequate;
- preservation of customer connections that an employee has developed while working for the employer – to allow a period of time for another employee to consolidate the customer relationship; and
- (for non-poaching clauses) the need to preserve the stability of the workforce after key staff have left.
In addition to the legitimate business interest, the covenant must go no further than is reasonably necessary to protect that interest, having regard to the nature of the employee's role. This relates to both the type of restrictions imposed, and their width and duration. Validity is therefore very fact specific – both in terms of the precise scope of the restrictions and the nature of the particular job. Reasonableness is judged at the time that the restriction is entered into, not at the point of enforcement. This means, for example, that it is not possible for an employer to introduce covenants into contracts where there is no legitimate business interest to protect, in the hope that they will be enforceable at a later date.
In other words, employers cannot enforce a covenant without a very good reason for doing so – hence the degree of surprise and concern at the government's initiative.
The review isn’t looking at confidentiality clauses and intellectual property law – the government seems to think that employers should be able to rely on these protections instead of using non-compete clauses. But, as mentioned, a confidentiality clause may not constitute adequate protection. It is difficult to distinguish between information that is confidential and that which forms part of an employee's skill and knowledge (which can therefore be used freely after termination of employment); and a confidentiality clause may be difficult to police effectively. As for intellectual property law, this is a quite different type of protection, aimed at preserving ownership in intellectual property rights created in the course of employment.
If the government does decide to introduce prohibitions or restrictions on non-compete clauses, it is not clear how these might affect restraints that are not included in contracts of employment themselves, such as those in:
- deferred remuneration schemes – they often provide that employees will continue to receive a benefit after the end of employment provided they have not joined a competitor;
- agreements linked to the award of valuable share options or other benefits;
- shareholder or business sale agreements linked to the termination of a manager's employment with the company.
Having surveyed clients in the UK on some of the issues raised in the call for evidence, we put in a response; raising concerns that employers would no longer be able adequately to protect the legitimate interests were the use of post-termination restraints to be restricted. We are now waiting for the government to complete its analysis of the feedback and to report on potential next steps.