Non-Compete - Reform or Abolish?

As many of my HR and Employment Lawyers contacts will be aware the Government has issued a consultation on non-compete clauses in employment contracts and other workplace contractual documents. The closing date for the consultation is the 26th of February 2021.

In short the question the Government is asking is – should non-compete clauses be abolished entirely or reformed to open up competition - and with it the economy?

Help the Economy ‘bounce back’?

This has been a topic of interest to employment lawyers for many years. It's come to the fore this year in light of COVID-19 and the Government’s desire to support an economic ‘bounce back’ - to use their phrase.

The Government is exploring various ‘avenues to unleash innovation and to create conditions for new jobs and increased competition’. 

It's been argued by many employment lawyers, particularly lawyers like me who act primarily for senior executives, that non-compete restrictions (post termination of employment) prevents key skills being utilised in the economy and amounts to a restrict of trade. Not only this, but often when the relationship has broken down they are used by employers as a ‘last dig’, when the reality is they are either not enforceable or obsolete, but employers bank on the employee not having the funds or inclination to litigate the matter.

Most non-compete restrictions last for 6 to 12 months after the individual has left employment, but some for much longer. The effect of this is that many employees are unable to utilise the full extent of their skills and are required to seek employment outside of their chosen area within their industry. The argument is that this stifles growth and competition.

Restrict of Trade vs Legitimate business interest to protect

For the most part there is general agreement among employment lawyers that a non-compete restriction should be enforceable - where there is a legitimate business interest to protect and the restriction goes no further than that protection. From the employer’s perspective they are only seeking to protect their business from advantages competitors would gain were they to hire their ex-employee - with knowledge and importantly contacts they have acquired during their tenure.

The argument runs that employees gain valuable knowledge and skillsets because of the contacts, products, and business opportunities the employer has built up over years. As such they should be able to prevent other businesses using them. Threatening to or seeking to enforce those restrictions where they suspect a breach by the employee, and indeed the hiring employer, is a legitimate and necessary step for them to take. However, and back to the earlier point, the knowledge, and skills these employees have acquired is highly valuable commercially and to prevent them using them is to stifle economic growth. You can see how the argument goes around and around!

Buy Out - the US (California) model

The discussion continues -if we keep non-competes should we look to the US model, in particular California, were employers provide compensation to the employee for the duration of the non-compete clause? The employer gets their protection, and the employee gets financial security, seems like a win/ win – but it doesn’t address the stifling of the economy which the Government wants to address.

Listening to several employment lawyers on a recent webinar there's a wide spectrum of opinions.  For the most part there is general agreement non competes should be enforceable, where there is a legitimate business interest, and the restriction goes no further than to protect that interest. However, the question on compensation has created a wide and varied response. The compensation question is not one that can be answered with a simple ‘yes’ or ‘no’.

There are numerous aspects to consider including - if garden leave clauses can be utilised, carve outs negotiated? Can an employer elect not to enforce a non-compete to avoid paying compensation? If compensation is paid in instalments can conditions be attached for instance if other employment is secured and therefore to avoid double recovery? 

The legal loop hole

Arguably there are other tactics employers can use which will provide them with the protection they are seeking, but which does not restrict the employees ability to trade, stifle their skills and utilising their experience within the economy. Non-dealing, non-soliciting clauses for instance remain. Any employment lawyer you speak to will expect non-dealing and non-solicit clauses to be ramped up should non-compete restrictions be curtailed as a result of this consultation. 

Whilst the consultation may result in an change in employment law around non-competes, it may do little to 'bounce back' the economy.

Contact Details 

Please feel free to contact me in confidence if you would like to discuss any of the points above or need advice and guidance on your non-compete or any other legal issues at work.