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Non-compete clauses – is this the beginning of the end?

Business Secretary Sajid Javid has recently announced that the Government is to investigate employment rules that could be stifling entrepreneurship and preventing employees from starting up their own business. The investigation is taking place with a call for evidence, inviting views from the business community on whether non-compete clauses act as a barrier to innovation and hinder start-ups from hiring the best and the brightest.

Non-compete clauses can prevent individuals from competing against their former employer or working for competitors for a specified period of time after their employment has come to an end. They are a common armour relied upon by employers seeking to protect their businesses and many will be fearful at the prospect of these defences being curtailed or stripped away.

Why the focus on non-compete clauses?

The Government is looking to make Britain the most attractive place in Europe for new business start-ups and innovation. Tech City is paving the way for tech businesses in the UK and it may be that the success stories of start-ups in Silicon Valley have had some influence on the Government’s approach. In particular, non-compete clauses are not permitted under Californian law, except in the most limited of circumstances. Those who believe that competitive restraints are a barrier to business will no doubt argue that their absence has helped companies such as Uber and Airbnb flourish there.

However, others may take the view that our existing system already strikes the correct balance between protecting legitimate business interests and fair competition. The starting point in the UK is that non-compete provisions are unenforceable as they are in restraint of trade. The courts will only enforce non- compete clauses if they go no further than is reasonably necessary to protect a legitimate business interest. There is a raft of case law which has fine-tuned this requirement over the years and many cases where our courts have refused to enforce clauses considered to be too wide and unreasonable. We need only look to the recent case of Bartholomews Agri Food Limited  v Thornton which has confirmed that paying for a covenant that is too wide will not render it enforceable. It is certainly the case that the bar has been set high and only the most carefully drafted restraints which have been tailored after careful analysis will stand.

Call for evidence

The call for evidence is seeking the views of more established businesses alongside those of entrepreneurs and there is unlikely to be a unified response from either camp. Whilst the removal of any restraints might provide initial relief for entrepreneurs and small businesses, there is a concern this would be at the cost of long term security for established businesses. Start-ups keen to unshackle themselves from competitive restraints may not feel the same way as their businesses grow. In the future, facing the risk of significant value walking out of the door without any deterrent or recourse may not be an attractive prospect.

The call for evidence is available here  DWF is responding to the call for evidence and would be interested in hearing the views of employers. If you would like to discuss this issue or share your views on the current proposal please Get in Touch

 

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Legal news, views, trends and tools for HR Professionals. Stay ahead. Go further