Employers often seek to protect their business interests by including non-compete restrictive covenants in employment contracts for senior staff members. These clauses prohibit the employee from working for a competitor or establishing a competing business for a defined period after termination. However, the law surrounding non-compete clauses is part of English common law and is subject to development by the courts on a case-by-case basis.
The Government launched a consultation between 04 December 2020 and 26 February 2021 to reform the law on non-compete restrictive covenants. This was following the economic impact of the Covid-19 pandemic where the Government was exploring the option of restricting the use of restrictive covenants in order to maximise opportunities for individuals to start new businesses and find new work. On 02 March 2022 it was announced that the Government’s response would be published “in due course” but no timeframe was provided and the response is still awaited. The Government sought views on two proposals:
- banning restrictive covenants altogether;
- a requirement for employers to pay compensation in return for the restrictive covenant if they want to stop a departing employee from joining a competing business, or banning such clauses altogether.
In California, non-compete clauses are void, regardless of whether they are reasonable, while in Israel, the courts have limited the enforceability of non-compete clauses. Although the success of these international examples is based on various factors, their innovative approach to non-compete clauses should not be discarded as playing a part.
At Winston Solicitors, we regularly advise clients on the use of non-compete clauses and other restrictive covenants to protect their business interests. While these clauses are commonly included in contracts of employment for senior staff, they are also frequently used as part of settlement terms in settlement agreements.
The legal principles surrounding non-compete clauses form part of the doctrine of restraint of trade. The courts have recognised the tension in this area between an individual's freedom to trade and the need to uphold contracts and protect legitimate interests as part of a contract. The court's task is to balance these competing aspects of public policy. The law presumes that all non-compete clauses and other restraints of trade are unenforceable unless they are shown to be reasonable.
To be considered reasonable and enforceable, a non-compete clause must protect a legitimate business interest of the ex-employer and not be wider than reasonably necessary to protect that interest. The employer bears the burden of proving reasonableness in both respects. Therefore, a non-compete clause is only enforceable if an employer can prove to the court that it is reasonably necessary to protect its legitimate business interest. If the court is not persuaded, the non-compete clause is unenforceable.
If an employer successfully enforces a non-compete clause, the employer may seek an injunction or damages from the employee for breaching the covenant or pursue other remedies.
In the post-Covid world and whilst the Government’s response to its consultation is awaited, it remains to be seen whether non-compete clauses will continue to be a typical feature of employment contracts for senior staff or part of settlement terms in settlement agreements.
If you require legal advice regarding non-compete clauses or other restrictive covenants, please do not hesitate to contact Winston Solicitors. Our team of employment law experts is here to assist you with all your employment law needs.
