Call us on:  0808 172 93 22 | Offices: London - Northampton

ARE EMPLOYERS ABOUT TO LOSE A VALUABLE WEAPON AGAINST COMPETITION?

For many years employers have used non-compete clauses in contracts of employment to get some breathing space for a specified period between an employee’s departure and them engaging in competitive activities. The justification for the period where the ex-employee’s activities are restricted is that it gives the employer the chance to shore up relations with customers. Over this period any confidential information the ex-employee was privy is likely to lose its commercial sensitivity.

The Department for Business, Energy and Industrial Strategy is now considering reforming the use of non-compete clauses in contracts of employment and is seeking consultation on the options. At the end of this month, the consultation process closes – 26 February 2021.

What’s on the government’s agenda?

Views are being sought on whether there should be a “think twice” approach or an outright “ban”. What will this mean for employers?

The “think twice” approach

The first option would be to discourage non-compete restrictions by employers having to pay compensation during the term of the restriction. The need to pay compensation may mean that employers think before they automatically reach for a non-compete clause.

“The consultation has identified three possible levels of compensation based on 60%, 80% or 100% of weekly average earnings for the restricted period.”

Unless the individual is operating at a senior level, has access to highly sensitive information or plays a key role in maintaining customer relations it appears unimaginable that any business would want to consider paying compensation at these levels for a defined period after the employee has left. Views are however being sought on time.
The consultation is also considering transparency measures and statutory limits on the length of non-compete clauses to sit alongside the compensation requirement. Transparency measures are likely to make it mandatory for employers to disclose the terms of the non-compete agreement before the employment starts. The consultation document has identified three potential maximum restricted periods i.e., 3, 6 or 12 months. Clearly, the longer the restricted period the greater the level of compensation.

Non-compete restrictions may be banned!

In simple terms, the second option would be for non-compete clauses to be prohibited once the employment has ended.

“The consultation is inviting thoughts on whether organisations would be able to sufficiently protect their business interests by other means, giving examples of confidentiality clauses and intellectual property law.”

Is there a reference point for these changes?

The government appears to be looking at how other countries approach this issue. Those businesses that operate on an international basis will already be aware that there is a marked difference across the globe with regard to the control of post-termination activities. In the USA for example, each state has its own set of rules. An employer in California which has a reputation for being an employee friendly state, will know too well that a non-compete restrictions is unlikely to be enforced by the court. If you operate in Texas, the court is more likely to look on your business more favourable.

The concept of ex-employees being paid compensation is not new. In Germany restrictive covenants are permissible subject to the detailed requirements of the German Commercial Code, which requires employers to pay compensation amounting to at least 50% of the employee’s total recent earning for the period of the restraint. France takes a similar approach where compensation is usually around 30% of the employee’s former salary for the duration of the restriction.

Why is this change being proposed?

While it may appear counterintuitive in the current climate to remove the protection which goes to the core of most business operations, the government considers reforming non-compete clauses may be one way of supporting the economic recovery and the labour market, which is much needed due to the COVID-19 pandemic.
While the justification appears on the face of it to have merit given the challenges the country is facing, some employers and lawyers may feel it is flawed.

“Enforcing a non-compete restriction in the employment context has always been notoriously difficult given the starting point is that it is unenforceable.”

The onus is on the employer to establish the restraint of trade is reasonable with reference to a variety of factors. If it gets to the point where the court needs to intervene, many employers are put off because of the risks associated with this type of litigation including high costs, there being no guarantee of success and the chance of having to pay the ex-employee damages. Many businesses gave up on non-compete restrictions some time ago due to a lack of confidence that a claim would be successful. Armed with this knowledge and the fact that only those employers with deep pockets will pursue them through the courts, savvy employees would often take the risk.

In reality, are non-compete restrictions hampering business innovation and the creation of new jobs to the level which requires consultation and ultimately statutory control? If so, to what degree?

What protection are businesses likely to be left with?

Looking ahead, compensation may be a more attractive option as it at least provides an employer with the choice when it is identified that an individual could do significant harm to the business if they joined a competitor.

“Non-compete restrictions never exist in isolation particularly as these are the ones that the court is least likely to enforce.”

Usually, other restrictions will be in place as a fallback position such as the confidentiality clause, or the non-solicitation or non-dealing clauses. The courts prefers these restrictions because an individual is not prevented from earning a living. These types of restrictions can survive alone and if properly drafted could give a business the protection it needs.

However, the consultation documents indicates that consideration is also being given to whether other post-termination restrictions should be reformed in the future.

Should employers now be exploring more innovative ways to protect their businesses?

For the time being and until the government legislates for something different, there is no reason why well drafted restrictive covenants that have been properly incorporated into the contract of employment cannot be used to protect the businesses’ commercial interests. While it may be some time before there is any clarity on the limits employers will face, it will do no harm for employers to consider what other ways their interests can be protected.

FG Solicitors’ legal team are experts in helping its clients safeguard
their businesses, so that they have greater certainty
over their financial and operational outcomes.

If you require further guidance on how to manage the departure of a key employee, please feel free to call us on 0808 172 9322 for a no obligation discussion.

For further details about the commercial legal service and assistance we provide to businesses, please click here. 👇

https://www.fgsolicitors.co.uk/services

This publication is for general guidance only. Advice should be taken in relation to a particular set of circumstances.

Updated: by FG Solicitors
Call us on:  0808 172 93 22

ARE EMPLOYERS ABOUT TO LOSE A VALUABLE WEAPON AGAINST COMPETITION?

For many years employers have used non-compete clauses in contracts of employment to get some breathing space for a specified period between an employee’s departure and them engaging in competitive activities. The justification for the period where the ex-employee’s activities are restricted is that it gives the employer the chance to shore up relations with customers. Over this period any confidential information the ex-employee was privy is likely to lose its commercial sensitivity.

The Department for Business, Energy and Industrial Strategy is now considering reforming the use of non-compete clauses in contracts of employment and is seeking consultation on the options. At the end of this month, the consultation process closes – 26 February 2021.

What’s on the government’s agenda?

Views are being sought on whether there should be a “think twice” approach or an outright “ban”. What will this mean for employers?

The “think twice” approach

The first option would be to discourage non-compete restrictions by employers having to pay compensation during the term of the restriction. The need to pay compensation may mean that employers think before they automatically reach for a non-compete clause.

“The consultation has identified three possible levels of compensation based on 60%, 80% or 100% of weekly average earnings for the restricted period.”

Unless the individual is operating at a senior level, has access to highly sensitive information or plays a key role in maintaining customer relations it appears unimaginable that any business would want to consider paying compensation at these levels for a defined period after the employee has left. Views are however being sought on time.
The consultation is also considering transparency measures and statutory limits on the length of non-compete clauses to sit alongside the compensation requirement. Transparency measures are likely to make it mandatory for employers to disclose the terms of the non-compete agreement before the employment starts. The consultation document has identified three potential maximum restricted periods i.e., 3, 6 or 12 months. Clearly, the longer the restricted period the greater the level of compensation.

Non-compete restrictions may be banned!

In simple terms, the second option would be for non-compete clauses to be prohibited once the employment has ended.

“The consultation is inviting thoughts on whether organisations would be able to sufficiently protect their business interests by other means, giving examples of confidentiality clauses and intellectual property law.”

Is there a reference point for these changes?

The government appears to be looking at how other countries approach this issue. Those businesses that operate on an international basis will already be aware that there is a marked difference across the globe with regard to the control of post-termination activities. In the USA for example, each state has its own set of rules. An employer in California which has a reputation for being an employee friendly state, will know too well that a non-compete restrictions is unlikely to be enforced by the court. If you operate in Texas, the court is more likely to look on your business more favourable.

The concept of ex-employees being paid compensation is not new. In Germany restrictive covenants are permissible subject to the detailed requirements of the German Commercial Code, which requires employers to pay compensation amounting to at least 50% of the employee’s total recent earning for the period of the restraint. France takes a similar approach where compensation is usually around 30% of the employee’s former salary for the duration of the restriction.

Why is this change being proposed?

While it may appear counterintuitive in the current climate to remove the protection which goes to the core of most business operations, the government considers reforming non-compete clauses may be one way of supporting the economic recovery and the labour market, which is much needed due to the COVID-19 pandemic.
While the justification appears on the face of it to have merit given the challenges the country is facing, some employers and lawyers may feel it is flawed.

“Enforcing a non-compete restriction in the employment context has always been notoriously difficult given the starting point is that it is unenforceable.”

The onus is on the employer to establish the restraint of trade is reasonable with reference to a variety of factors. If it gets to the point where the court needs to intervene, many employers are put off because of the risks associated with this type of litigation including high costs, there being no guarantee of success and the chance of having to pay the ex-employee damages. Many businesses gave up on non-compete restrictions some time ago due to a lack of confidence that a claim would be successful. Armed with this knowledge and the fact that only those employers with deep pockets will pursue them through the courts, savvy employees would often take the risk.

In reality, are non-compete restrictions hampering business innovation and the creation of new jobs to the level which requires consultation and ultimately statutory control? If so, to what degree?

What protection are businesses likely to be left with?

Looking ahead, compensation may be a more attractive option as it at least provides an employer with the choice when it is identified that an individual could do significant harm to the business if they joined a competitor.

“Non-compete restrictions never exist in isolation particularly as these are the ones that the court is least likely to enforce.”

Usually, other restrictions will be in place as a fallback position such as the confidentiality clause, or the non-solicitation or non-dealing clauses. The courts prefers these restrictions because an individual is not prevented from earning a living. These types of restrictions can survive alone and if properly drafted could give a business the protection it needs.

However, the consultation documents indicates that consideration is also being given to whether other post-termination restrictions should be reformed in the future.

Should employers now be exploring more innovative ways to protect their businesses?

For the time being and until the government legislates for something different, there is no reason why well drafted restrictive covenants that have been properly incorporated into the contract of employment cannot be used to protect the businesses’ commercial interests. While it may be some time before there is any clarity on the limits employers will face, it will do no harm for employers to consider what other ways their interests can be protected.

FG Solicitors’ legal team are experts in helping its clients safeguard
their businesses, so that they have greater certainty
over their financial and operational outcomes.

If you require further guidance on how to manage the departure of a key employee, please feel free to call us on 0808 172 9322 for a no obligation discussion.

For further details about the commercial legal service and assistance we provide to businesses, please click here. 👇

https://www.fgsolicitors.co.uk/services

This publication is for general guidance only. Advice should be taken in relation to a particular set of circumstances.