Business secretary Sajid Javid recently announced a ‘call for evidence’ on whether restrictive covenants should be prohibited or their use curtailed.
A ‘call for evidence’ invites interested parties to submit their views on a particular issue as part of government’s policy formulation process. It does not necessarily lead to legislation or any other action. That said, reform of restrictive covenants is clearly a distinct possibility. The business secretary has indicated he wants to take action to break down barriers curbing innovation and to “look into employment rules that could be stifling British entrepreneurship by preventing employees from starting up their own business after leaving a job”.
Restrictive covenants in employment contracts are intended to limit the ability of employees to compete with their former employer after employment ends. They can take many forms. They are often a suite of protections for the employer, from non-compete clauses prohibiting the departing employee from working for a competitor business for a period post-employment, through to provisions stopping the employee from soliciting the ex-employer’s customers or trying to recruit his or her former colleagues.
However, an employers’ scope for legal action to enforce the covenant is not unconstrained. To be enforceable post termination, the clauses need to be reasonable in their geographical scope and time frame, and in relation to the employer’s and employee’s position at the time the contract was entered into.
Whether covenants are enforceable or not is inherently case specific. The voluminous case law in this area means that the position is not always clear or predictable. Non-compete clauses in particular are susceptible to legal challenge for being excessive in terms of protecting the ex-employer’s business interests. Even if there is a risk they might be unenforceable, employers may consider that including them in key employees’ contracts gives them some commercial leverage on an individual’s departure.
The law in this area tries to balance employees’ need to earn a living and keep their skills up to date against employers’ need to protect trade secrets, client connections, a stable workforce and business goodwill. It could be argued there is no need to change the current law because the case law on restrictive covenants reflects a sophisticated balancing of the interests of employers and employees developed over many decades.
The counterargument, specifically in relation to non-compete clauses, is that they stifle competition, innovation and personal freedom, and that confidentiality clauses provide sufficient protection for business knowledge, and intellectual property law does the same job in more technical sectors.
Of course, one employer’s unreasonable restraint of trade can often be another’s legitimate protection of the knowledge and trade connections that the departing executive has gained, so it is unlikely that employers will speak with one voice in relation to this call for evidence, especially since the use and practical value of covenants varies dramatically across sectors.
Overseas jurisdictions deal with the issue of non-compete clauses in a variety of ways. In some, departing employees must be paid at a prescribed rate for any period in which they are kept out of the labour market, thereby providing compensation for their inability to work in their chosen area for the prescribed period. However, given the references to ‘innovation’ in the announcement of the call for evidence, maybe what the government is contemplating is the regime followed in the US state of California. Here, broadly speaking, non-competes are prohibited and clauses preventing the solicitation of clients are only enforced if necessary to protect trade secrets (which could be the client list itself).
Full details on the call for evidence have not yet been published so it will be interesting to see what specific questions it asks and whether the scope of its review will extend beyond pure non-compete clauses to other forms of restrictive covenant, possibly including ‘garden leave’ which achieves much the same objective as a non-compete clause. This will be a space worth watching as the debate unfolds.
Story via – http://www.cipd.co.uk/pm/peoplemanagement/b/weblog/archive/2016/05/09/government-calls-for-views-on-non-compete-provisions-in-employment-contracts.aspx