Employment News: non-compete clauses

Hogan Lovells

Hogan Lovells

One size doesn’t fit all – non-compete unreasonable and void

In Quilter Private Client Advisers v Falconer the High Court found that a nine month non-compete covenant was in restraint of trade and void. The case is a useful reminder of some factors to take into account when drafting or seeking to enforce covenants to minimise the risk that they will be found to be unenforceable.

Ms Falconer joined Quilter Private Client Advisers as a financial adviser in January 2019 but resigned during her probationary period because of unhappiness with the level of administrative support she was receiving and restrictions on the products she could recommend to clients. She went to work for one of Quilter’s competitors, which was on the face of it in breach of a nine-month non-compete clause in her contract of employment. Quilter took steps to enforce the covenant, although not for several months after it found out she was working for a competitor, and brought other claims relating to alleged misuse of confidential information and to enforce non-solicitation and non-dealing covenants.

Although the case deals with a number of claims, the High Court’s finding that the non-compete clause was unenforceable is of most interest. Although Quilter had legitimate interests to protect in the shape of confidential information and customer connections, the restriction went further than was reasonably necessary to protect those interests. The Court highlighted the following factors in coming to that conclusion.
  • The nine-month restriction applied irrespective of the length of Ms Falconer’s employment. A two week notice period applied during her six month probationary period. It was unreasonable to prevent her from being employed by a competitor for nine months when her employment might have lasted just a few weeks and the probationary period made it reasonably foreseeable that employment could terminate after a relatively short period.
  • A short notice period implies that an employee’s services are less valuable to the employer and in less need of protection. Even after her probationary period, Ms Falconer was only entitled to receive two months’ notice.
  • Other more senior employees within the business were subject to the same restraints as (or in one case shorter restraints than) Ms Falconer. Quilter had not provided evidence to justify imposing the same or longer restraints on a junior employee who did not have access to the same degree of confidential information as more senior employees. This indicated that it had taken a “one size fits all” approach and had not properly considered what restrictions would be suitable for an employee of her status.
  • A non-dealing covenant would have been adequate protection for Quilter’s business interests. This undermined the argument that the non-compete restriction was necessary. The evidence also suggested that non-competes were unusual and not industry standard for employees acting as financial advisers, which cast doubt on the argument that a non-compete was necessary. The delay of nearly five months in seeking to enforce the non-compete also indicated that Quilter regarded its non-solicitation and non-dealing covenants as sufficient to protect its position.


Déjà vu – government consults on future of non-competes

In 2016 the government was concerned that non-compete clauses inhibited innovation and prevented entrepreneurs from starting businesses in the UK. However, after a call for evidence, it concluded that the existing framework balances the interests of employers and employees reasonably well and that no changes were needed.

However, the concern about suppressing competition and stifling start ups has resurfaced because of the need to promote economic recovery and stimulate job growth after the pandemic. The government has published a consultation paper outlining two proposals for reform, either of which would have a significant impact on employers.
  • Under option one, non-compete clauses would be unenforceable. Employers would have to rely on intellectual property rights and the law of confidence to protect their legitimate business interests.
  • Under option two, employers would be required to compensate employees for the duration of a non-compete, probably as a percentage of the employee’s average weekly salary. Such a requirement is already reasonably common in other European countries. The government anticipates that this would encourage employers to consider more carefully whether a non-compete is genuinely needed and if so for how long, rather than taking a “one size fits all” approach. It is also possible that the government could impose a maximum duration on non-competes, of between three and twelve months, if it pursues this option.

At this stage it is not clear whether the proposals would apply only to non-competes in employment contracts or to a wider range of agreements as well, such as share option schemes and consultancy arrangements.

We will be responding to the consultation on non-compete clauses, which closes on 26 February 2021. If you have any comments you would like us to include in our response, please contact Stefan Martin or Ed Bowyer.

The other consultation paper is a reaction to the consequences of the pandemic for low paid workers and part of the government’s intention to “build back better”. It proposes extending the current ban on exclusivity clauses in zero hours contracts and accompanying protections against dismissal or detriment for accepting work in breach of such a clause to all workers with guaranteed earnings of less than the lower earnings limit. There would be an exception for individuals working a small number of hours on a high hourly rate. This is designed to allow low paid workers whose hours have been reduced as a result of the pandemic to seek work from other employers without facing or being threatened with adverse consequences for doing so. As such it seems a sensible reform.


Season’s greetings

This is our last newsletter of 2020. We hope you have a safe and as far as possible enjoyable holiday period. We will be back in January 2021 with a round-up of developments and a webinar focussing on what changes we can expect to employment law next year.

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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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