Non-compete clauses: Protecting your business or restricting your employees?
The Government’s recent announcement that it intends to curb non-compete clauses in employment contracts has raised considerations for businesses and employees across South Wales.
The proposals could change how businesses protect their commercial interests, and in the following article, James Lewis-Hyndman, Solicitor and Employment Law specialist at Peter Lynn and Partners, explains what non-compete clauses mean in practice and what employers should consider before their next move.
What exactly is a non-compete clause?
A non-compete clause is a restriction within an employment contract that prevents an employee from joining a competing business or setting up their own competing operation for a specified period after leaving their employer.
They are particularly relevant where employees have access to confidential information, valuable customer relationships, pricing structures or commercially sensitive business plans.
The Government is considering changes to these rules, including restrictions on the length and use of non-compete clauses. However, no general ban has taken effect yet.
So what are the Pros and Cons of such clauses?
The Benefits of Restrictive Covenants Include
- Protecting confidential information. A carefully drafted clause can reduce the risk of sensitive commercial knowledge being taken directly to a competitor.
- Safeguarding customer relationships. Businesses invest considerable time developing client relationships and may need protection when employees with direct customer access leave.
- Protecting investment. Companies investing in specialist knowledge, research and business development may want safeguards against competitors gaining an immediate advantage.
- Allowing time to manage departures. A proportionate restriction can give businesses breathing space when senior or commercially important employees move on.
- Establishing clear boundaries. Well-drafted employment contracts can help both parties understand what activities are restricted after employment ends.
Potential Disadvantages to the employer:
- Reduced recruitment opportunities. Employers looking to recruit experienced people may face unnecessary barriers when candidates are subject to restrictive covenants.
- Employee dissatisfaction. Excessive restrictions can discourage prospective recruits and damage relationships if existing employees decide to leave.
Could garden leave become more common?
One concern surrounding the proposed reforms is whether businesses will increasingly rely on longer notice periods and garden leave to protect themselves.
Garden leave allows an employer to require an employee to remain away from work during their notice period while continuing to receive their contractual pay and benefits.
Unlike a post-employment non-compete clause, the employee remains employed throughout that period. However, garden leave arrangements must still be legally appropriate and supported by the employment contract or agreement.
Employees offered voluntary redundancy should also consider whether their departure involves restrictive covenants, garden leave, notice payments or a settlement agreement. The terms can have important consequences for future employment.
What should Employers do now?
Employers should review whether existing restrictions genuinely protect their business and whether alternative provisions, such as confidentiality or non-solicitation clauses, may be more appropriate. An employer usually must show that the restriction protects a legitimate business interest and goes no further than reasonably necessary.
Whether you are an employer looking to introduce, amend or remove restrictive covenants, or an employee considering a new job, challenging a restriction, negotiating voluntary redundancy or reviewing a garden leave arrangement, taking legal advice early can help protect your position.
For specialist Employment Law advice, please contact James Lewis-Hyndman and the Employment Law team at Peter Lynn and Partners Solicitors:
▶︎ 01792 450010
▶︎ peterlynnandpartners.co.uk