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Is A Non-Compete Clause Enforceable? What To Know

Non-compete clauses are common in employee contracts and restrict an employee from working for an employer’s competitors or setting up in competition if they leave the organisation in the future. Non-compete clauses usually stipulate conditions including a timeframe for which the clause remains in force and sometimes a geographical area if that is relevant to the specific industry. Some non-compete clauses will list competitors by name.

If an employee breaches a non-compete clause, it is usually up to the courts to decide on an injunction and/or compensation if the dispute ends up in litigation. Most employee contracts do not offer additional consideration in response to the restriction of a non-compete clause; this is merely a term of the employment. Re-negotiated contracts for existing employees may well offer extra consideration which can either be monetary or some sort of in-kind benefits like flexi-hours, free training or just the additional enhancements that go with a promotion.

Are Non-Compete Clauses Still Appropriate?

Non-compete clauses are more relevant to certain industries — such as product development — than others. An employee may be asked to sign a non-compete clause in order to protect trade secrets. 

A sales consultant will almost certainly be requested to sign a non-compete clause in order to protect customer relationships. Roles that develop lucrative customer relationships are normally protected so that the employee cannot work for a competing firm and take customers with them. 

In December 2020, the UK government started a consultation called “Measures to reform post termination non-compete clauses in contracts of employment”. The consultation finished in February 2021. It sits in the context of a post-Brexit and COVID-19 landscape with a clear intention to curb non-compete clauses to nurture business — especially startups.

It is a stated aim of the consultation to “support economic recovery from the impacts of COVID-19…to boost innovation, create the conditions for new jobs and increase competition”. 

The UK government had previously considered the issue of restrictive covenants in 2016 – a non-compete clause is classed as a restrictive covenant – but did not take any action at this time. COVID-19 has provided a fresh impetus.

The UK government was influenced by the tech sector in the US, in particular, California’s Silicon Valley. Non-compete restrictions are illegal in California, and there has been a subsequent explosion in entrepreneurial culture.

Brexit and the desire for the UK government to nurture startups also played a role as this recent article in the Financial Times discusses: “UK aims to nurture startups by curbing non-compete clauses”.

Many UK businesses readily admit that non-compete clauses are often only contained in a contract of employment to act as a deterrent. They may not be legally enforceable, and the company may elect not to attempt enforcement after the employee has left.

Now that the UK government has taken a fresh interest in non-compete clauses, the writing may be on the wall that they’re about to become a thing of the past.

Is a Non-Compete Clause Enforceable?

A non-compete clause is not legally enforceable unless it is reasonable. Whether or not it is reasonable should, under current law, be decided by reference to the circumstances at the time the employee entered into it.

Clauses that specifically define a timeframe and geography are more likely to be enforced than vague, potentially wide-ranging, and open-ended clauses.

Having said that, geography and timeframe restrictions must be reasonable in the context of the industry or business. Crucially, the reasonability test is applied at the time of signing, not when the employee leaves the company.

Clauses preventing an employee from earning a living are also less likely to be upheld by the courts. Suppose the company has offered an employee compensation to enter into the non-compete clause, either financial or benefits in kind. In that case, the court will also factor this into the test of reasonableness.

Why Non-Compete Clauses May Be Unenforceable

A non-compete clause may be unenforceable because it was not a reasonable clause to impose when the contract was signed. The courts will generally not support provisions that make it difficult or impossible for someone to earn a living.

A non-compete clause may be unenforceable because it specifies too broad a geographical area — hampering or preventing the employee from obtaining any other form of work.

Similarly, a non-compete clause that is in force for too long a period of time is likely to be ruled unreasonable by the courts. What the courts deem a reasonable timeframe depends on the nature of the industry. Courts will usually uphold non-compete clauses between six months and two years in duration, providing they do not fail the reasonableness test on other factors.

Industry restrictions that are vague or too broad will be deemed unreasonable by the courts. A narrow and precise definition of the non-compete clause is more likely to pass the reasonableness test. 

A non-compete clause that was theoretically enforceable when the employee signed the contract may become unenforceable subsequently because of a change of role, status or remuneration.

Employers should be aware that a significant change in an employee’s position can render a non-compete clause unenforceable. A new non-compete clause may have to be re-negotiated as part of a fresh contract.

Conclusion

The specialist employment team at Helix Law offers advice on non-compete clauses in this changing climate for employers and employees. If you want to protect your business with non-compete clauses or if you want to check what you can do if you want to leave your employer, let Helix Law provide guidance on the terms you have entered into. We can also provide specific wordings and draft terms and conditions that will hold up in court. 

Helix can also conduct regular reviews of existing employment contracts to reflect changes in employee status and new developments at the government level. 

We can also offer guidance on the overlap between non-compete clauses and non-disclosure agreements which may also be relevant. Non-compete clauses can also be used as a restrictive covenant to protect business interests in a broader business context.

Posted by:

Fiona Wheeler
Solicitor

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