Call for Evidence into non-compete clauses

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The Government has launched a call for evidence to look at whether post-termination restrictions in employment contracts act as a barrier to employment, innovation and entrepreneurship.

The courts will only enforce post-termination restrictions, including non-compete clauses, if they are reasonably necessary in order to protect a legitimate business interest. Currently, many employers include in their employment contracts a suite of post-termination restrictions in order to protect their business. This may include restrictions on soliciting business from customers or suppliers, or from poaching senior staff.

The Call for Evidence has not suggested a ban of post-termination restrictions at this stage. Instead, it is intended to obtain views on whether these clauses have a detrimental impact on “opportunities to innovate and grow”.

Even if the Call for Evidence does suggest reform in relation to the use of non-compete clauses, we would not expect an immediate change or an outright ban on the use of such clauses. Instead, we expect that a proposal will be drawn up before a further consultation is launched seeking views on the Government’s proposal.

In our view, it is difficult to see how banning the use of post-termination restrictions would generate innovation. The damaging effect on employers is clearer to see. An employer that has invested time and money in an employee who is then allowed to go off and immediately compete has lost any chance to protect its business and client relationships from that competition. We are therefore dubious as to whether there will be any real support generated for the removal or dilution of non-compete clauses in the UK.

Finally, even if restrictions were imposed on the use of non-compete clauses, this is only part of the picture. If an organisation wants to prevent an employee from joining a competitor they may have the contractual ability to place the employee on garden leave for the duration of their notice period, thus keeping them out of the market. Although this is more expensive for employers than utilising a non-compete clause as the employee is paid during their notice period, this may be a small price to pay to protect the business from losing its talent to one of its competitors.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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