REWARD
Non-compete clauses to be limited
Danny Done, managing director of Portfolio Payroll , discusses the latest updates regarding non-compete clauses, and what employers need to know
W hen the government revealed its first tranche of proposals to amend employment laws derived from the European Union (EU) in Great Britain, it tagged on another unrelated and almost surprise announcement about non-compete clauses. The announcement confirmed that the government will progress plans to restrict the usage of these clauses. Although the announcement came out of the blue, the plan to regulate non-compete clauses isn’t new. It is, in fact, something the government consulted on at the end of 2020, which may explain why it was surprising to see it re-emerge now; partly because it’s been over two years since the consultation closed and partly because the whole consultation may have gone under the radar for some who were, at that time, still trying to navigate the impact of Covid restrictions on their business. The consultation was launched two days after the second Covid lockdown ended. Non-compete clauses are often found in a document called a restrictive covenant. The purpose of all elements within the document is to restrict an employee’s economic activity for a defined period when they leave an organisation. These documents are considered a valid measure for businesses seeking to protect their interests, for example, their: l client lists l existing talent l sales strategies l secret recipes. They’re often given alongside a contract of employment. It’s advisable to obtain agreement to the document as part of the initial employment documentation, because implementing them part way through employment is less straightforward. There are four principal types of covenant: l non-compete clauses stop the
though some can extend to 12 months. The government has announced it will bring in new legislation limiting the application of a non-compete clause to a maximum period of three months. No other element of a restrictive covenant mentioned above will be affected. Why has the government done this? This is an attempt to build on measures already taken to make Britain the “most dynamic place to work in the world”, based on a high-skill, high-wage economy. This is to be achieved by increasing the amount of flexibility in the labour market, boosting opportunities for businesses to start-up, grow and create jobs. To deliver this, the government wants to make it easier for individuals to start new businesses, find new work and apply their skills to drive economic growth. Non-compete clauses are seen as barriers which prevent individuals from working where they want to or applying their entrepreneurial spirit to a competing business. What should employers do? Employers should review the duration of existing non-compete clauses and prepare to update them. Any duration longer than three months will need to be changed if these proposals are implemented. The inclusion of garden leave in a contract of employment should be considered. This enables employers to require an employee working their notice not to come to work, but they’re unable to work anywhere else because they’re still employed by their current employer. We may also start to see longer notice periods, especially for more senior employees, which, when used in conjunction with garden leave, may achieve an effect similar to a longer non- compete clause. n
employee from working for a competitor for a specified period of time in a specified geographical area, or from setting up business as a competitor l non-solicitation clauses prevent employees from soliciting the business of clients or customers of a former employer. However, they don’t prevent an employee from working with a former client or customer if that client or customer makes
contact directly with the employee l non-dealing clauses stop the
employee from both soliciting clients or customers of a former employer and also dealing with the clients or customers. These are more comprehensive than non- solicitation clauses, because they cover the employee engaging with any activity with former customers or clients for a specified period of time, regardless of who makes the first contact l non-poaching clauses prevent employees from encouraging former colleagues to leave the employer and join them in their new organisation. The commercial element to them means that an enforcement of a breach by an ex-employee will be done through the civil courts rather than an employment tribunal because the claim will be brought by the employer, not the ex-employee. What’s happening with non- compete clauses? There are no specific laws which govern the use of restrictive covenants other than the concept of ‘reasonableness’. The application of the agreement cannot be deemed a ‘restraint of trade’; or an unreasonable limitation on the employee attempting to earn a living once they have left their previous job. An important factor in reasonableness is the length of time the agreement covers. Restrictive covenants should last for a specific period, which is set out in the agreement itself. It’s common for agreements to last for three to six months,
| Professional in Payroll, Pensions and Reward | July - August 2023 | Issue 92 50
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