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Employers beware of plans to scrap non-compete clauses

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The government is looking into banning non-compete clauses in a bid to boost commercial innovation. Harrison Drury’s Employment team discusses what this means for employers and explains how they can limit their exposure.

Restrictive covenants, or non-compete clauses, are included in employment contracts to stop ex-employees working for a rival, setting up in competition, or soliciting the customers and clients of the employer, for a specified period after their employment period ends. They are designed to protect an employer’s confidential information, including their customer base.

Non-compete clauses are a way of safeguarding business interests and many people believe companies are entitled to protection for a reasonable length of time after an employee quits.

What the government want to do – and what this means

Business Secretary Sajid Javid wants to promote entrepreneurial start-ups by removing barriers that he says are stifling enterprise.

As part of a consultation process, the government is examining the views of employers and employees. If ministers decide to introduce the proposals, employers could suffer as a result of competitors acquiring their confidential information from former members of staff.

Are the proposed changes really necessary?

Whether the government’s proposals are needed is debatable. This is because legally enforceable restrictive covenants must be drafted carefully to reflect narrowly defined areas of commercial activity, the geographical area covered, and how long they last.

Indeed, it has been argued that early-stage enterprises are more concerned with funding problems, regulatory issues and recruitment challenges, than restrictive covenants relating to people who have already moved on.

Alternative solutions are also available

It is questionable whether removing the ability to include non-compete clauses in employment contracts will be affective in achieving this objective. Other options are open to employers wanting to stop ex-employees from immediately re-entering the market.

Employers can require a key employee to serve longer notice periods with the ability to place that employee on garden leave for this period, therefore breaking the contact with the employer’s customer base.

Alternatively, non-compete clauses can be included in alternative agreements, such  as settlement agreements in return for a payment, and shareholder agreements if an employee is also a shareholder.

Time will tell whether the government goes ahead with its proposals, but in any event employers are advised to ensure non-compete clauses are professionally drafted.

For further information on non-compete clauses, or any other employment law matter, call the Employment team on 01772 258321. Harrison Drury have a team of employment solicitors in Preston and all around Lancashire who are happy to help and provide legal advice on a number of matters.


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