When an employee leaves a company, there are often non-compete clauses contained in their contract of employment that prevent them from working for a competing company, and/or setting up their own business in competition for a set period of time. But given that this could potentially prevent the employee from working in their own occupation for the time period in question, should the employer be required to compensate the employee, or should such non-compete clauses be banned altogether?
Non-Compete Clauses
It is part of the implied duty of fidelity contained in all contracts of employment, that the employee must not compete with their employer, and must serve their employer with good faith, loyalty, and with regard to the employer’s best interests. However, the implied duty of fidelity does not extend to the period post termination of employment. Hence, should an employer wish to limit the extent to which the employee can work for a competitor for a period of time post termination of employment (usually between 3-12 months), then an express non-compete clause will need to be included as a restrictive covenant within the employee’s contract of employment.
Enforcement
Employers should exercise caution when drafting non-compete clauses, as should they be drafted too widely in a manner that goes well beyond just protecting the employers legitimate business interests, then the employer runs the risk that the non-compete clause constitutes a restraint of trade, and of being declared void and unenforceable.
Consultation
As we have highlighted previously, the Government launched a consultation on the 4th December 2020 as to whether their needs to be reform / abolition of non-compete clauses. That consultation closed on the 26th February 2021. As of yet, there has been no Government response to the consultation.
The consultation was launched as part of the Government’s “build back better” plans. The Govcernment's position is that there is a need to promote a more entrepreneurial culture, particularly in the area of the next generation of emerging technologies, such as advanced robotics, artificial intelligence, the Internet of Things, 3-D printing, automation, and blockchain. As non-compete clauses are a barrier to competition, the Government take the view that reform of them, or even their abolition, could help to nurture more start-up businesses.
Nevertheless, it has to pointed out that for all the Government's grand words back at the time of the launch of the consultation, they are completely at odds with the deafening silence since the consultation closed, and with the fact that there was no Employment Bill included in the Queen's Speech. Hence, in terms of any reform, it is probably best to adopt a believe it when you see it approach.
As well as the option of a complete ban, one of the measures under consideration as part of the consultation in terms of reform includes a requirement to pay the employee for the duration of the non-compete restriction. Another option that has been mooted is to impose a statutory limit on how long the restrictions imposed by any non-compete clauses can last for.
An added benefit of such reforms, the Government suggest, is that it will deter employers from including “unnecessary” non-compete clauses in employment contracts.
Non-Compete Clauses In Other Countries
Other countries such as Germany, Italy, and France have already introduced rules which compel employers to compensate employees for the duration of any non-compete clauses they are subject to.
The Merits Of Compensating Employees
Compensating employees, whether voluntarily or as a result of a legal obligation to do so, will help to remove any financial incentives the employee may have to breach the non-compete clauses, thereby removing the need for the employer to pursue expensive court action to enforce the restrictive covenants. However, one option that some employers may wish to consider in terms of reducing the risks of breach of contract by former employees and the need to enforce further, is to simply place the employee on garden leave as an alternative to requiring adherence to the non-compete clauses. This could potentially enable the employer to either jettison the non-complete clauses altogether, or to reduce the period of the restriction
Moreover, a requirement to provide the employee with compensation will compel the employer to examine in detail whether the non-compete are absolutely necessary, and whether they should be waived altogether, or reduced in length.
Nevertheless, compensating employees can be extremely expensive for employers, expecially in relation to senior employees / high earners. It can make a redundancy / cost cutting situation a lot more difficult, and could potentially make the difference between the survival of a business and bankruptcy in certain situations
