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Carol Davis comments on the BIS plans to call for evidence on potentially stifling employment rules and considers a world without non-compete clauses

At the end of last month, the Department for Business, Innovation and Skills ("BIS”) announced plans to look into employment rules that could be stifling British entrepreneurship by preventing employees from starting up their own business after leaving a job. The announcement is part of the Government’s drive to develop an ‘Innovation Plan’ which will, according to BIS, set out how the Government can help make the UK a better place to turn ideas into new products and technologies. It is all part of the Government’s pledge to make Britain the best place in Europe to innovate and start up a new business.

According to BIS the call for evidence is "a move designed to back even more small businesses and entrepreneurs across the country”. The specific question under investigation will be whether post-employment non-compete clauses limit innovation and entrepreneurship by hampering the efforts of start-ups and small businesses to hire the most talented people. The BIS announcement quotes Emma Jones, founder of Enterprise Nation:

"The UK continues to record over half a million start-ups being formed each year, with many people starting a business by holding onto the day job and building the business at nights and weekends. Entrepreneurial individuals need to be able to ease out of employment and into self-employment so a move to look into how employment contracts reflect this and the modern economy is warmly welcomed.”

Well, um, yes. Up to a point. There is certainly an argument for saying that the hard-working budding entrepreneur who burns the midnight candle, working every evening and weekend to come up with innovative high tech business ideas instead of succumbing to the wine-based and boxed set pleasures of the indolent, should not be unduly hampered in his/her efforts by unnecessary red tape or unduly onerous and unfair contractual restrictions. However, I am struggling to buy the argument that non-compete clauses really do have a stifling effect on innovation.

At present, non-compete clauses are not upheld by the Courts lightly or just for the sheer heck of it. Such clauses are only enforceable if they go no further than is reasonably necessary to protect an employer’s legitimate business interest (such as confidential information, the stability of the workforce or client base). If there is no legitimate business interest capable of identification or the clause is too broad, it will be regarded as being in restraint of trade and it will not be upheld. So, for example, a clause which simply seeks to prevent competition as an end in itself will be given short shrift by the Court. Similarly, where an employer’s legitimate business interest is adequately protected by the means of a non-solicitation and/or non-dealing clause, any additional non-compete clause will almost certainly be unenforceable.

So to suggest that post-termination non-compete clauses prevent the brightest and best of Britain’s talent either from creating their own businesses or finding gainful employment with a vibrant and thrusting start-up fails to have regard to the fact that the Courts are well-used to, and more than capable of, balancing the competing interests of employer and employee – the interest of the employer on the one hand in preventing unfair competition and the interest of the employee on the other in moving on and away from the employer in his /her career.

There is also an argument for saying that by and large it is not the honest and faithful hard-working budding entrepreneur who finds non-compete clauses problematic, but only the budding entrepreneur who unlawfully and unfairly decides to get ahead of the game by misusing his/her employer’s confidential information or pinching colleagues or customers.

As with most things in life, balance is all. An employer must have the right to protect its business and to rob an employer of that right to protection must surely be far more damaging to innovation than a properly drafted enforceable non-compete clause could ever be. One has to ask who in their right mind would start a business and employ anyone remotely capable if there was no means of preventing those individuals leaving their employment and setting up in unfair competition by exploiting the fruits of their former employer’s labour and hard-won business.

Although the ‘call for ideas’ in relation to the Innovation Plan itself is live now and open until 30 May 2016, the date on which the specific call for evidence in relation to non-compete clauses has not yet been announced. It is also unclear whether it is only non-compete clauses that are to be looked at in isolation, or whether evidence is to be sought into other types of restrictive covenants which restrict an employee’s ability to carry out business post termination. No doubt all will be made clear in time but the prudent employer might decide not to adopt a wait and see position but instead review all contracts of employment and actively consider the extent to which its business interests really are protected from a departing employee with a mind to compete unlawfully. It would be wise to look at other means of protection, such as non-solicitation, non-dealing covenants and sensible and business legitimate periods of garden leave.

For now, the answer in relation to non-compete clauses lies in making sure that they are thoughtfully and tightly drafted, they relate to a clearly identifiable and genuine legitimate interest and go no further than is reasonably necessary to protect that interest. For anything else, the answer perhaps lies in a glass of Malbec and a box set.

Posted: 23.05.2016 at 11:37
Tags:  Comments  Employment Law
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