Businesses need to protect their interests when key people leave to join a competitor. Many companies and firms therefore include post-termination restrictive covenants in their employment contracts and partnership agreements, and it will be unusual for a partner, LLP member, senior executive or other key employee not to be subject to post-termination restrictions of one form or another as part of their terms of engagement.
In the first part of a new series on restrictive covenants and other forms of business protection, Partner David Fisher looks at non-compete restrictions in employment contracts.
Although restrictive covenants are notoriously difficult to get right – and there are many examples each year of employers who try to enforce them in the courts and fail – they can give vital protection to a business when an employee leaves, but they must be used appropriately and drafted carefully.
In most cases where a court decides a restrictive covenant is unenforceable, it’s because the relevant clause in the employee’s contract is badly worded or it tries to impose restrictions that aren’t necessary for that individual. Restrictive covenants need to be tailored to the particular business and the employee’s role, otherwise they could be worthless.
When are restrictive covenants enforceable?
Post-termination restrictions are not permissible if they’re only intended to prevent competition. To be enforceable, the restrictions have to protect one or more of the employer’s “legitimate business interests”, which normally means its trade secrets and other confidential information, its customer or supplier connections, or the stability of its workforce. Also, a covenant must go no further than is reasonably necessary between the parties to protect those interests – which means it’s unlikely to be enforceable if the duration of the restriction is too long or if a less onerous restriction would have sufficed.
Types of restrictive covenant
The most common restrictive covenants are those which prohibit the misuse or disclosure of the employer’s trade secrets or confidential information, prevent the former employee from soliciting or dealing with particular clients or customers for a limited period, and prohibit the poaching of senior staff and other key employees who have remained with the business.
In the majority of cases these types of restrictions will be sufficient to protect the employer, and anything more stringent will be unnecessary and therefore potentially unenforceable.
However in some situations the courts recognise that the only way the business can effectively protect its legitimate interests (and especially its trade secrets and other confidential information) is to stop the individual from working for any of its competitors for a short time, in which case a restriction of this type (usually referred to as a “non-compete” restriction) will be permitted. This could have the effect of shutting the individual out of their industry or their area of expertise for the duration of the restriction.
Are non-competes just for senior employees?
It’s not just business leaders or senior managers who might have a non-compete restriction as part of their employment terms – employees at all levels can be bound by such a term if the nature of their work requires it.
For example, in Norbrook Laboratories (GB) Ltd v Adair [2008] IRLR 878, the High Court ruled that a twelve month non-compete restriction imposed on a junior sales representative who had access to her employer’s confidential pricing information and customer lists would not be unreasonable given the shelf-life of the information concerned, and that it could reasonably prevent her from working for a competitor in any capacity (and not just in a sales role) due to the real risk that confidential information would be revealed to a new employer irrespective of the job she was doing. However the Court went on to find that the restriction was unenforceable, because it sought to prevent Ms Adair from working for anyone whose products competed with those she had offered for sale or sold on behalf of Norbrook at any time during the last five years of her employment, which was unreasonably wide. If the restriction had been defined in relation to products she had dealt with in the last one or two years of her employment, it seems likely that it would have been upheld.
No need for compensation
In some jurisdictions, if an employer wants to hold a former employee to their restrictive covenants and prevent them from working for a competitor, it has to carry on paying the individual for the duration of the restriction. This isn’t a requirement of the law in the UK, unless the employee has negotiated such an entitlement as part of their contract – which would be very unusual.
How long can a non-compete restriction last?
There is currently no fixed limit on the duration of a non-compete restriction, and it is up to the courts to decide what is reasonable in each case. While research suggests that the average length of a non-compete restriction is around six months, there is no reason why a court cannot uphold a clause that prevents an employee from joining a competitor for twelve months or even longer, if that is justified in the particular circumstances.
Proposed limit on non-compete restrictions
Non-compete restrictions can deter employees from moving between jobs and starting new businesses, which is said to hinder economic growth, and for this reason the government carried out a consultation exercise between December 2020 and February 2021 on possible measures to limit the use of non-competes. This led to the government announcing its intention in May 2023 to introduce a statutory limit of three months on non-compete clauses in employment and worker contracts.
While this might have seemed like good news for many employees, there are some potential drawbacks to the proposal:
- The three-month cap will only apply to non-compete clauses in employment and worker contracts, and not those in partnership, LLP or shareholder agreements. This means that partners in traditional partnerships, LLP members, and employees with shareholding arrangements could still be subject to longer non-compete restrictions.
- It is unclear whether non-competes in settlement agreements will be covered – if not there will be scope for employers to introduce longer restrictions as part of any severance arrangements (for example, in return for enhanced redundancy payments).
- There is no intention to limit the duration of other types of restrictive covenant, such as non-solicitation and non-dealing restrictions, which might still deter some employees from moving between jobs or make them less attractive to potential employers.
- Employers might introduce alternative measures to protect their business interests, such as longer notice periods and greater use of garden leave restrictions, which could apply regardless of whether the employee is leaving to join a competitor and therefore be more restrictive for the employee than having a longer non-compete clause.
It’s unclear how the proposed limit will affect existing non-compete restrictions which last for longer than three months. Under normal principles, if a court decides that the duration of an otherwise enforceable restriction is too long in a particular case and that a shorter restriction would have sufficed, the restriction will be void and the court will not rewrite it so that it lasts only for that shorter period. Although it would make sense for a statutory cap to work differently (at least for non-competes entered into before any legislation comes into force, so that an otherwise enforceable restriction would just have its duration cut down to three months), we will have to see what the legislation says on this point.
When will the limit be introduced?
There doesn’t appear to have been any significant progress towards enacting the limit since the government’s proposals were announced, and with a general election required before the end of January 2025 it’s doubtful whether the legislation will be introduced in the coming months. However the effect of non-compete restrictions on the mobility of workers and the resulting impact on economic growth will remain an issue, and although the next government might take a different approach to the matter, a statutory limit on the use of non-competes is still a real possibility. Until then, employers should make sure that the non-compete and other post-termination restrictions they use are up to date and are likely to be enforceable as the law currently stands.
If you have any questions arising from this article, or would like to discuss non-competes in your employment contracts in more detail, please contact Partner David Fisher who specialise in employment and partnership law.
