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27th April 2016

The Government ‘calls for evidence’ on non-compete clauses

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The Department for Business, Innovation & Skills has plans for a ‘call for evidence’ on non-compete clauses.

As part of a wider pledge to make Britain the best place in Europe to start up a new business and to break down barriers curbing innovation and entrepreneurship, the Department for Business, Innovation & Skills has announced plans for a ‘call for evidence’ on non-compete clauses.

Employers often include non-compete clauses in contracts of employment in an attempt to prevent a former employee from competing with them for a certain period of time after the employment relationship has ended.

Whilst such clauses will only survive the scrutiny of the courts and be enforced if they are narrowly drafted and go no further than is absolutely necessary to protect the former employer’s legitimate business interests, they are often included in contracts of employment to act as a deterrent. It has therefore been suggested that non-compete clauses mean start-ups are unable to hire “the best and brightest talent”, stifling innovation and growth.

However, employers need not get overly concerned or excited (delete as applicable) yet as the Government is not suggesting a ban on non-compete clauses at this stage. The call for evidence is only seeking to identify whether the use of such clauses does prohibit “innovation and employment”. The result of the call for evidence will, however, determine whether or not the Government pursues any further action on the use of such clauses.

It is questionable whether tackling non-compete clauses used in contracts of employment on their own will result in greater innovation and entrepreneurship as there are many other ways an employer can keep an employee out of the market for a certain period of time, including making use of longer notice periods and garden leave provisions. Further, in return for additional compensation, employers can seek to incorporate new or tighter, more enforceable non-compete clauses within a Settlement Agreement (a legal agreement setting out the terms on which an employer and employee agree to part company). Where a former employee is also a shareholder of their former employer, similar non-compete clauses may be included in any Shareholder’s Agreement, which are not only likely to be for a longer duration post termination (potentially up to 2 years) but also, given the more equal bargaining position of the parties, more likely to be enforceable.

As such, whilst it will be interesting to see what the outcome of the call for evidence is, it is unlikely that the use of non-compete clauses alone may be curbing innovation and entrepreneurship and, even if the Government were to ban the use of non-compete clauses, whether this would have any positive impact at all.

If you want to know more please visit our Employment Services Page or email Lynne Adams by clicking here.