Building a Shield against Non-Compete.

Non-compete clauses may be banned

In our recent article regarding the Department for Business, Energy and Industrial Strategy’s consultation on reforming the use of non-compete clauses, consideration was given to what may lie ahead for employers including the possibility of an outright ban on employers preventing employees from working for competitors.

Consultation has now closed but it will be some time before we know whether legislation will be introduced to limit or ban the use of non-compete restrictions and whether there will be a call for the removal of other restrictions from contracts of employment. Given the agenda is promoting a shift away from employers being able to protect their businesses towards creating more opportunities in the labour market, employers will need to consider how they can restock their armoury to protect against competitive activities when the changes arrive.

Proactive risk management

In assessing what might work for your business, the starting point should be to identify where the risks are and what impact they would have on the commercial and financial aspects of the business if they became a reality. Suggested areas for review would be customer connections, the workforce, key personnel and those that are highly skilled and your confidential information. The question to consider is what damage would arise if any of these key components of your business ended up in the hands of your competitors?

In the absence of any legislation or otherwise prohibiting the use of non-compete clauses and other post-termination restrictions, there is no reason why employers cannot for the time being remain faithful to the practice of having restrictions in the contracts of employment. However, any covenants in place should be reviewed to identify if they are fit for purpose and would withstand the scrutiny of the courts. A one size fits all approach to restrictions in contracts of employment is never a good place to start. From a risk management perspective, there is little point in having restrictions in place if they are badly worded or have no relevance to the role the employee is currently undertaking.

Apart from non-compete clauses what other options are there?

There are other ways of protecting the business’ interests and preventing competition that do not involve direct post-termination restrictions. Some possible options are considered below:

• Consider strategies for staff engagement and retention. Staff who feel engaged and have career development opportunities are more likely to stay with you. This can decrease the risk of the business being exposed to competitive activities. Employee questionnaires are a good way of obtaining staff feedback about what they value about working for you and areas for improvement, which will assist to inform your strategies.

• Understand what other contractual provisions may have value. Employees who are on garden leave during their notice period are out of your business, which allows for time to manage and strength client relations. By the end of the garden leave period, confidential information may have lost its commercial sensitivity. Garden leave clauses can be used in conjunction with other restrictions. Setting off a period of garden leave against the duration of a direct post-termination restriction can result in the court finding the restrictions is a reasonable restraint of trade.

A properly drafted confidentiality clause that clearly sets out what confidential information and trade secrets are in the context of the business and employee’s work is a powerful tool against competition. Without such a clause, an employer can only rely upon the implied obligation to protect trade secrets following an employee’s departure, which for many businesses does not go nearly far enough to protect against the sort of mischief the misuse of for example, pricing lists or a tender submission can create if in the hands of a competitor.

• Do not give an employee a good reason to challenge the remaining clauses. If the contract of employment is breached by the employer, then the contract comes to an end. This means that the employee’s continuing obligations after their departure will no longer be valid. Employers can minimise the risk of this scenario as follows:

o If dismissal is on the cards, ensure that the employment ends in accordance with the contractual terms.

o Avoid situations where the employee may argue that there has been a fundamental breach of their contract entitling them to resign and treat themselves as dismissed. For example, not addressing a grievance properly.

o Watch out for the “tactical” employee who knows they are unlikely to be any continuing obligations if the above scenario arises. A job offer from a competitor or a desire to set up in competition on their own account may just lead to an employee attempting to construct a scenario, which would allow them argue the contract has been breached and they are not bound by any post-termination restrictions.

• Introduce rights or obligations that deter employees from leaving.

There is a lot of scope here with the deterrent being that the employee is likely to lose out on cash or shares if they leave. For example, a long-term incentive plan may have a forfeiture clause triggered on the employee’s departure, a share plan may have its own restrictive covenants, a bonus payment may be dependent on being in employment on a specified date or subsidised training costs may become repayable on exit. While these types or arrangement have their own advantages in the war against competition, employers need to ensure that if challenged they would be able to demonstrate they are not an unreasonable restraint of trade or in the case of clawing back any training costs, the amount recovered would not be found to be a penalty.

Even if employers will not have as many options available to them in the battle against competition in the future, a broader more bespoke approach which reflects the nature of the business and its specific risks may achieve a similar outcome to that which can be achieved solely with post-termination restrictions.

FGS’ legal team are experts in helping its clients to safeguard their businesses, so that they have a greater certainty over their financial and operational outcomes.

If you require further advice about protecting your business from ex-employees’ new work activities or strategies to retain your talent, please feel free to call us on 0808 172 93 22 for a no obligation discussion.

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This update is for general guidance only and advice should be taken in relation to a particular set of circumstances.