Non-compete clauses have, for years, been a thorn in the side of both business owners and employment lawyers alike. Described by the Courts as “the most powerful weapon in an employer’s armoury,” post-termination restrictions are designed to protect the legitimate business interests of an organisation and prevent damage by unscrupulous ex-employees.
They usually include a legally binding obligation to prevent an ex-employee competing with an employer for a specific time after their employment ends. In recent years however, more and more organisations have routinely relied on non-compete clauses as a ‘catch all’ method to prevent exiting employees moving to a competing business, often resulting in expensive, time consuming and unnecessary litigation.
The Government is now acting to substantially limit the ability of businesses to restrict competition and prevent non-compete clauses lasting more than three months. Whilst this certainly opens up greater potential for the movement of employees across competing businesses and a more diverse recruitment pool across industry sector, the risk the reforms present for businesses to protect their legitimate business interests and retain valuable employees is substantial.
Enforcing non-compete clauses has been the subject of many Court cases over the years. While generally they can be challenging to enforce, if carefully drafted and tailored to the role and circumstances, Courts can grant injunctions to prevent ex-employees joining their new employer. Restricted periods are usually three to six months, but Courts have enforced non-compete clauses which last longer.
From the perspective of a business recruiting staff, the reforms are a welcome change. In fast paced industries, waiting three months for an incoming employee to be outside their restricted period is far more palatable than waiting six or 12 months. Individuals who bring with them a substantial client following will be able to move jobs more easily and without the fear that they could face an injunction. Equally, the new employer also knows that it will no longer face a civil claim for inducing a breach
of contract, beyond the three month restricted period. However, it poses a real concern from a retention perspective, with employees more likely to explore job opportunities elsewhere without the fear of retaliation and feeling able to cope with a three-month restricted period rather than much longer.
Businesses should act now to take a two-pronged approach in respect of retaining employees and protecting their legitimate business interests. Retention should not be as a result of employees feeling that they ‘can’t’ leave a role, but because they choose not to. This means being proactive and looking at the culture of a business, the opportunities available to existing employees and recognising the employee’s value through incentives such as a good benefits package, flexibility where possible and an attractive salary at market rate.
Post-pandemic, more and more employees reported that a healthy work-life balance was essential to their good mental health and their desire to remain with their employer. This is an opportunity for businesses to review existing policies and packages and
shift the focus away from preventing employees joining a competitor to creating an environment in which they thrive and are not looking elsewhere.
Inevitably of course, there will be employees who leave, irrespective of how good the work culture is. To address that, businesses should look now at the methods which remain available to them to protect their legitimate business interests and in particular revisit their contracts and policies as they can be effectively used to minimise the risk of damage when the person leaves.
Relying on garden leave clauses, for example, is a very obvious method to keep employees away from competitors during a period of notice, whilst keeping them contractually bound by confidentiality obligations. Following a period of garden leave, post termination restrictions can kick in which, in many cases, will achieve the additional protection being lost in the reforms. However, employers do need to ensure their contracts of employment give them the power to place an employee on garden leave.
It should be noted that the reforms do not extend to other restrictive covenants such as non-solicitation, non-dealing and non-poaching clauses. These alone can provide substantial protection to a business’ legitimate interests and employers should look
at ways of strengthening these provisions in their contracts in light of the upcoming changes. However, they must be drafted correctly to be enforceable and employers should not include them in everyone’s contract as that will weaken enforceability.
The implications of the reform for settlement agreements are yet to be explicitly addressed. Employers often agree to additional non-compete restrictions as part of an agreed settlement with an exiting employee, often in return for an additional payment. Settlement agreements may continue to fall outside the scope of the reform, allowing employers to include longer non-compete clauses.
Additionally, the reform’s impact on existing employees’ non-compete clauses lasting longer than three months, remains uncertain. Employers might face the challenge of re-negotiating contractual terms to comply with the new legislation, while preserving essential business protections.
The legal landscape of non-compete reform poses challenges and opportunities for employers and employees alike. As the proposed changes to non-competes inches closer to becoming law, businesses must carefully navigate the impli-cations for recruitment and retention strategies, by revisiting their existing contracts to maximise the protections, as well as reviewing their approach to incentivising employees to remain with them. This is also a ripe opport-unity for businesses to investigate
and address any cultural concerns which would encourage employees to consider making a move, in order to create a strong, committed staff base and minimise both the number and negative impact of exiting employees.
