Government considering ban on non-compete clauses

Legal experts fear employers will suffer from removal of constraints on where and how departing employees can work

The government has opened a consultation to investigate banning or severely restricting the use of non-compete clauses that specify where and how employees can work when they leave a business.

The covenants are often used to prevent former employees from setting up as, or working for, a competitor, which the government fears is constraining entrepreneurship by preventing talented staff from striking out on their own. It is inviting comments from both employers and employees, with a view to potentially outlawing the clauses entirely.

However, non-compete clauses are also used to ensure staff cannot take contacts or intellectual property from their employer to a direct rival – and the possible removal of these legal protections is already causing alarm among some experts.

Announcing the consultation, business secretary Sajid Javid said: “I am clear that I want to see more enterprising start-ups and greater productivity in a free and fair marketplace, by making sure we take action to break down any barriers that are curbing innovation and entrepreneurship.”

He was backed by Emma Jones, founder of Enterprise Nation – which is partnering with the government to support entrepreneurship – who added: “Entrepreneurial individuals need to be able to ease out of employment into self-employment, so a move to look into how employment contracts reflect this and the modern economy is warmly welcomed.”

Employment lawyers, however, were less supportive. Dan Begbie-Clench, a partner at Doyle Clayton, said: “My understanding is that this would remove non-compete clauses entirely, or at least limit their application. There are some issues with non-competes, but if these changes were put in place and non-competes were prohibited, it wouldn’t necessarily generate innovation but is probably going to be harmful for many employers.

“If non-compete clauses are abolished, the old employer is going to suffer significantly because they have invested a lot of time and money in that person and they have just been allowed to effectively lift some of their expertise and immediately go off and compete. The purpose of the [current] restrictions is to give the employer a reasonable amount of time to ring-fence their business and protect themselves.”

Helen Burgess, a partner at Shoosmiths, said she was surprised by the consultation. “Unless there are going to be some exemptions, I don’t think this is going to be very helpful to larger businesses,” she said. “It tends to be an issue between big competitors, particularly for individuals with lots of business contacts that the outgoing employer doesn’t want to see exploited for the benefit of the new employer.

“It is not something I am aware of as being a barrier for innovation. I would not imagine [non-competes] are something our clients would be looking to get rid of. While it is frustrating if they have someone coming to them who has a non-compete, it benefits them on the other side.”

In 2014, People Management reported that the UK was seeing a rise in “ridiculous and overly restrictive” covenants that prohibited employees from working for a broad range of competitors. However, many such clauses are not enforceable in law and may be used more as a deterrent than a legal tool.

Begbie-Clench said clauses were most commonly used in the financial services sector, as well as those with strong research and development interests. “There are a lot of cases in financial services, but you might say that is because these employers have deeper pockets and will go after people more. The downside for the employer could be huge – millions of pounds.

“It doesn’t stifle innovation; it might delay things, but it protects businesses from unfair competition. This doesn’t seem to be the right solution to the problem.”

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