What does the Future hold for Restrictive Covenants in Employment Contracts
It is completely understandable that all businesses want to limit the potential for former employees to poach their clients. In the current commercial climate is it all the more imperative to hang on to existing clients. Post-termination restrictions for employees involved in sales and business development are likely to be particularly robust for obvious reasons. In an effort to protect the business employers sometimes make the terms of the restrictive covenants in their employment contracts so rigorous that they become unenforceable.
The detrimental commercial impact that the coronavirus pandemic has caused has led the government, once again, to review the question of post-termination restrictions incorporated in employment contracts in all the various forms. A Consultation by the Department of Business, Energy and Business Strategy on non-compete clauses, with a view to reformation, is currently underway, closing on 21 February 2021. This is not the first time the government has put a spotlight on non-compete clauses, in 2016 it published a Call for Evidence to examine the good and the bad aspects of such clauses, however, no action was taken at that time.
The government focus seems to be set on limiting or abolishing restrictive clauses believing that this may allow more flexibility amongst the available talent pool providing the benefit of greater certainty for all parties and could have a positive effect on innovation and competition by making it easier for individuals to start new businesses and enabling the diffusion of skills and ideas between companies and regions. The options floated in the Consultation that the Department of Business, Energy and Industrial Strategy indicated that it is particularly interested to learn how the suggestion of making post-termination restrictions valid only for the duration of periods of time when the soon-to-be-former employer is still paying the employee. Alternatively, to make post-termination, non-compete clauses in contracts of employment unenforceable which would effectively end the practice of including post-termination clauses in employment contracts.
Daniel Theron, a partner, commented “post-termination non-compete clauses are part of English common law and as such is developed by the courts case-by-case, there is no statutory definition of a post-termination non-compete clause. The clauses are designed to limit former employees from working for competitors or starting up a business as a competitor for a set period of time after they have left the business” he also said “there are other types of restrictions such as non-solicitation, non-poaching and non-dealing clauses also aimed at preventing a former employee from accessing the client base or talent within a business for a period of time.”
At the present time, post-termination non-compete clauses walk a fine line between protecting a business and the rights of a former employee. A non-compete clause currently will only be deemed to be enforceable if it is intended to protect the legitimate business interest of a former employer and is not so wide that it is unreasonable. In any dispute, the employer bears the responsibility for showing and proving reasonableness.
It is highly likely that there will be changes and limitations in post-termination restrictions following the Consultation, however, whether any changes “unleash innovation, create the conditions for new jobs and increase competition” as the government hopes remain to be seen. The area related to former employees setting up a rival business is an especially risky area, given the fact that statistics inform us that 60% of new businesses fail in the first three years. It is not difficult to see that in, say, the fragile hospitality industry a well-establish restaurant owner faced with a former employee opening a rival establishment next door or around the corner could see sufficient regular customers defect to the rival which delivers a fatal blow, only for the start-up to fail within three years resulting in twice the lost jobs.
Restrictive covenants have always been a bone of contention and time will tell whether a relaxation of such clauses, if the Consultation recommends this course of action, will have the hoped-for consequences.