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Where now for non-compete clauses?

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The Government has recently announced that it intends to introduce legislation on “non-compete” restrictions.  Luke Menzies considers the options for employers from here.

The Government has announced this month that it intends to introduce legislation on “non-compete” restrictions (see details here).  Non-compete clauses are one type of post-termination restriction, often termed ‘restrictive covenants’.  Many of us will be familiar with such clauses, often lurking near the very end of our employment contracts.  The new proposal from the Government seeks to limit “non-compete” restrictions to a maximum of 3 months – on the basis of encouraging, rather than stifling, competition.  

Post-termination restrictions (PTR) on future employment activities are a mixed bag, and something we deal with regularly at Menzies Law.  They can legally be used to some extent where they are serving a ‘legitimate purpose’.  These are usually protecting some key business knowledge, such as client contacts, pricing and product information and they come in various forms, such as;

  • ‘non-solicitation’ (not pinching clients of your ex-employer)
  • ‘non-dealing’ (not doing any business with such clients), and
  • ‘non-poaching (not enticing recent colleagues away).

Such clauses often feel fair enough.  They rarely effect a person’s ability to find a new job or maintain an income.

Unfair and fair uses of post-termination restrictions

In my experience, it is the ‘non-compete’ type of PTR (not working for any competitor) that can often feel unfair in terms of being a real block to someone legitimately wanting to move on to a new job.  This can feel even more unfair where the departing employee feels they’ve been badly treated – perhaps even discriminated against – in their current job.

Occasionally I will see a non-compete that feels reasonable because it is in the contract of a key person.  A key person could genuinely do a lot of damage by moving immediately to a direct rival and using all their knowledge of their ex-employer’s products, pricing and client relationships.  They can use this information to win a lot of quick business at their ex-employer’s expense.  But these are exceptions.

I see many long non-compete restrictions where, contrary to what the current law requires, they were not carefully tailored to each employee’s specific position.  They did not take account of their salary, seniority and the length of their notice period, but simply whacked on as a blanket policy, with little or no thought.  (On some occasions, I’ve seen them imposed on everyone in a business, including administrators or receptionists!).

Under the current law, many of these non-compete restrictions are questionable in terms of whether a court would actually uphold them if the ex-employer were to sue.  Often the ex-employer and their lawyers know this but enjoy their ‘deterrent value’.  They would probably not to go to court over them but employees don’t know this.  They are often very fearful of being sued and financially ruined.

What is being proposed and what might it mean for employers?

The Government’s proposal to limit non-compete clauses to 3 months has a fair amount of good sense behind it.  It doesn’t allow an immediate departure to a rival but equally it doesn’t stop someone from being able to reasonably earn a living for too long.

Depending on the precise wording of the intended legislation, it may well be that employers considering it vital to prevent their key people from competing for 3+ months will find ways around the rule.


Some recent commentary suggests employers may respond to this legislation by extending the length of notice periods and will use garden leave more often.  I’m not so sure this is how most businesses will respond.

Long notice periods tend to cost a lot.  The beauty of a non-compete PTR is that it (usually) is free to deploy.   Would an employer replace an employment contract containing a free-to-use 12-month non-compete restriction with (say) a 12 month notice period instead?  In such a case the employer would have to pay an extra 12 months’ pay on top of the employee’s (normal) notice period.  Employers recognise when an employee doesn’t want to work for them anymore.  It might not feel a good use of money to insert long notice periods – except maybe those employers with very deep pockets.  Besides which, we all know that employees can just walk out of a notice period if they really want to.  The courts are not prepared to issue injunctions forcing someone to remain in their job.  That ship sailed a long time ago.

Aside from very wealthy employers or those determined to pay whatever is necessary to keep their people away from their competitors for as long as possible, it’s unlikely that we will see a big increase in notice periods.  It is only doubling, trebling or more of notice periods which would replicate the length of many non-compete clauses).

It is likely that employers will simply have to accept that the age of the long non-compete has largely come to an end.  They will have to think about other options and I look forward to creative alternatives being tried, such as perhaps:

  • Making key people shareholders and putting a non-compete in the shareholder agreement
  • Paying a post-termination bonus for being ‘good’ by not joining a rival, not pinching clients, etc. for an agreed period (the carrot rather than stick approach)
  • Altering bonus schemes so that you don’t get your final year’s bonus if you’ve resigned and are joining a competitor
  • More use of Long-term Incentive Plan (LTIP) schemes to achieve a similar outcome (paying out 6-12 months after you’ve left)
  • Using the latest technology to improve the policing of ex-employees’ compliance with other PTRs, such as non-solicitation and non-dealing.

The general theme is likely to be that employers are going to need to pay properly for keeping their employees away from competitors in the short-term.  This feels a reasonable thing for businesses to do.  It feels fairer than the current situation, where my experience is that too many employers are able to unjustifiably lock their departing staff out of new roles for too long, usually entirely without compensation.

If you’d like to discuss restrictive covenants in your employment contracts or are concerned that your covenants are being breached, please get in touch.  

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