Nath Solicitors looks at non-compete clauses in employment contracts and explains that, to rely on them, employers must ensure the provisions are drafted with care.
What is a non-compete clause?
A non-compete clause is a contractual provision, typically agreed between an employer and an employee, which restricts an employee from working for a competitor or starting a competing business after leaving their role. These clauses are intended to protect an employer’s legitimate business interests. In this context legitimate interests may include aspects of the business like:
- Confidential information
- Trade secrets (including client relationships and trade connections)
- Goodwill and reputation
Non-compete clauses often include restrictive covenants, preventing a former employee from, for example:
- Soliciting or poaching clients from their previous employer
- Persuading former colleagues to leave and join them at a new organisation
- Working with existing clients of the former employer in a similar or competing capacity.
The enforceability of non-compete clauses
Non-compete clauses can be seen as onerous if they are overly restrictive or disproportionate. This in turn can raise concerns about their enforceability.
Under common law, the principle of ‘restraint of trade’ has developed so that the restraint must be reasonable in its reach and duration. To be enforceable the restrictions should go no further than is necessary to protect a legitimate business interest. As such, a non-compete clause will generally be unenforceable unless it:
- Protects a legitimate business interest; and
- Is narrowly and reasonably drafted, in terms of scope, duration, and geographical area.
The Impact on Employers
If an employer wishes to safeguard confidential information or trade secrets, any non-compete clause must be carefully tailored. It should clearly specify:
- The conduct being restricted,
- The duration of the restriction, and
- The geographical scope of the restriction
Clauses that go beyond what is reasonably necessary to protect business interests may be deemed void by the courts, especially if they unfairly restrict an individual’s ability to work. If an employee can show that the interests of the employer could be protected by a lesser form of restriction the courts will think carefully before insisting that the employee be held to the original, more onerous restriction.
A Case Study – Quilter v Falconer (2020)
The way courts assess non-compete clauses was illustrated in Quilter v Falconer (2020). There the employee defendant, Ms Falconer, was employed as a financial advisor by the claimant company. She started work in January 2019 and left six months later. On her departure a nine-month restriction on working for competitors kicked in. Ms Falconer however immediately went to work for a competitor. Although the claimant was aware of Ms Falconer’s new role it did not take steps to enforce the restrictive covenant for several months.
The High Court held that the nine-month period of restriction was unreasonable. Reasons for the decision included:
- The nine-month period applied no matter how short a time Ms Falconer remained working for the claimant
- Ms Falconer was subject to a six-month probation period during which time the employer could terminate her employment at short notice but still hold her to a nine-month restriction from working for competitors
- Looking at the client-facing nature of her employment, Ms Falconer’s period of employment was so short that it was likely she would have built up only very short-term relationships with any clients
The court was also told that the claimant company appeared to use a ‘one size fits all’ contract so that employees much more senior and long standing than Ms Falconer had the same, or in some cases, less onerous restrictions in their contracts. It appeared that nobody at the claimant company had given any thought to the suitability of the restrictive covenants for an employee of Ms Falconer’s relatively junior status.
All of this highlights the need for tailor-made, carefully drafted contracts that are appropriate for each individual employee.
Why choose us
At Nath Solicitors, we provide expert assistance in drafting, implementing, and enforcing a wide range of commercial contracts, including employment contracts. In relation to non-compete clauses we advise both employers seeking to genuinely and reasonably protect their business interests and employees on their rights when beginning or ending a contract of employment. To find out how we can help you, contact us on 0203 983 8278 or get in touch with the firm online.