Employment Law: restrictive covenants and non-compete clauses

Restrictive covenants and non-compete clauses are common in employment contracts in the UK. Alex Jones, Managing Director of 365 Employment Law, explains their benefits. 

These clauses are designed to protect the business interests of the employer after an employee leaves the company. They can be used to limit damage caused to a business by employees leaving and joining a competitor, setting up a competing business, poaching key employees or using confidential information or business contacts.

What types of clauses are usual?

Non-compete clauses

Non-compete clauses are a type of restrictive covenant that prevents an employee from working for a competitor or starting a competing business for a certain period of time after leaving their current employer. These clauses are potentially enforceable in order to protect the business the employee is leaving. They have to be narrowly defined and should be for the time that is required to protect the business.

In December 2020, the UK government started a consultation called “Measures to reform post termination non-compete clauses in contracts of employment”. The consultation finished in February 2023. The UK government had previously considered the issue of restrictive covenants in 2016 – a non-compete clause is classed as a restrictive covenant – but did not take any action at this time.

It is important to note that restrictive covenants can be difficult to enforce. Two different people could have exactly the same contract, with different outcomes on a court’s decision on enforcement. The restrictive covenants could be enforceable and justifiable against one employee, but not the other.

The starting point for a court is that the clause is unenforceable, but it will be enforced if it protects a legitimate business interest. A number of factors will be taken into consideration, including the length of time in the clause, the geographical distance, and the seniority of the employee. For example, a short time and distance non-compete clause for a junior employee may be harder to enforce than a longer one for a senior employee.

The government has indicated it will introduce a statutory limit on the length of non-compete clauses of three months and will bring forward legislation to introduce the statutory limit when parliamentary time allows. Whilst this may be a specific aim, the likelihood of this becoming law is minimal, given the lack of parliamentary time, this not being a priority of the government, and a general election within 18 months.

Non-solicitation of staff and customers

In addition to non-compete clauses, there are other types of restrictive covenants that can be used in employment contracts. These can include non-solicitation clauses, which prevent an employee from soliciting clients or customers of their former employer, and non-poaching clauses, which prevent an employee from recruiting former colleagues.

Non-solicitation clauses relating to customers are more likely to be enforceable than non compete clauses, and have more direct effect. The same can be said for clauses that stop staff being poached. Provided such clauses have a reasonable time limit, both in terms of how long they apply, and how long back the period for customers/staff the employee has worked with goes, enforceability is likely.

Restrictive covenants might also prevent employees from joining competitors and restrict competitor employers from hiring restrained employees, as courts can enforce post-termination restrictions against the new employer and the former employee in some circumstances. Getting post-termination restrictions right could make a huge difference for the future profitability and security of your business.

Confidential information

A clause in a contract that protects the employer’s confidential information, such as pricing lists, customer details etc, will almost always be enforceable. Only if an employer seeks to restrict non-confidential information, it might end up with issues on enforcement. In fact, even without a clause, confidential information is protected with all employees owing their employer a duty of good faith not to use that confidential information. Cases on restrictive covenants often move quite quickly from a reasonable debate about enforceability, to an unwinnable case for the employee, when they have taken confidential information, and used that information to springboard their future employment or new business.

It is important to remember that restrictive covenants and non-compete clauses can be useful tools for employers to protect their business interests after an employee leaves the company. However, it is important for these clauses to be carefully drafted and narrowly defined in order to be enforceable.

Please always take advice on any staff related issues.

Tel: 01903 863284

ajones@365employmentlaw.co.uk

www.365employmentlaw.co.uk