The Government is considering a ban on restrictive covenants, but would this open the door to more poaching of staff? Daniel Pollard and Natasha Adom from GQ Employment Law LLP give the case for and against.
Earlier this year, the Government announced a call for evidence on whether or not restrictive covenants (or “non-competes”) should be banned.
It is concerned that restrictive covenants “unfairly hinder workers from moving freely between employers” and ‘”inhibit economic growth” by “reducing the pool of labour from which competitors can hire”. Banning them could fit in with the Government’s goal of having a flexible workforce. But what about the impact on businesses if restrictive covenants are banned?
The case for a ban on restrictive covenants
Individuals should be free to start businesses or move jobs if they choose to do so, and restrictive covenants unfairly prevent people from doing this. As there is no obligation to pay ex-employees during the non-compete period (as there is in Germany, for example), enforcing this can even prevent them from earning a living.
More on restrictive covenants
Task: include restrictive covenants in a contract of employment
Non-competitive restrictive covenant model document
How to draft restrictive covenants
The law on restrictive covenants is too uncertain and needs to be overhauled. It is difficult to say in advance to an employee or to an employer whether or not a restrictive covenant is enforceable. The only way either party can find out is to bring a claim to test whether or not it is valid, which is extremely costly and time consuming.
This uncertainty leads to some workers being fearful of leaving. It can deter them from starting new businesses and leaves them at risk of “bully boy” tactics by an old employer that wishes to unfairly stifle innovation from an ex-employee.
Some employers put restrictive covenants in contracts for all staff just because they can. This is particularly unfair for junior staff who may believe that they are unenforceable but are unable to contest them.
Businesses already have ways to protect their confidential information without using restrictive covenants. For example, customer information and trade secrets can be protected by using confidentiality clauses. Also, the law already prevents ex-employees from using their former employers’ intellectual property.
If restrictive covenants are banned then businesses will find that their staff can leave more easily, but they will in turn benefit from being able to recruit their own staff more easily and will no longer have to wait for a new recruit’s restrictive covenants to expire.
The case for keeping restrictive covenants
Employers need to use restrictive covenants as a practical way to protect confidential information and highly confidential know-how. This is because employees cannot “un-know” valuable information that they obtain about their employers.
The existing law has developed over a long period to develop a careful balance between the rights of individuals and of employers, and the basic principles are well understood by both.
Employers cannot unreasonably stop employees from moving elsewhere: covenants already have to be reasonable in what type of activity they can prevent and in how long they last. For example, a three-year restrictive covenant preventing someone from working in any field will not be reasonable or enforceable.
Protecting business interests is already difficult enough. As many businesses know, even if they have covenants in their contracts, the costs of enforcing them and the management time involved is significant and not something that they take lightly.
It can be argued that confidentiality clauses and intellectual property clauses provide protection. But practically it is very difficult to prove that an employee has taken confidential information or breached copyright. A non-compete clause provides a practical remedy which avoids the cost and complexity of that kind of litigation.
Also, businesses are entitled to protect workforce stability by preventing ex-employees from poaching staff: restrictive covenants are the only real way to protect this.
For many employers their value is in their people. For example, asset managers, salespeople, lawyers and other professionals. Removing restrictive covenants may destroy those businesses. Rather than buying a company, why not just poach its key people and get the business for nothing? For example, what is an insurance company without its brokers, what is an asset management company without its asset managers and what is the Great British Bake Off (other than a tent) without Mel, Sue and Mary Berry?
Companies that undertake research and commercialise technology rely upon non-competes to protect the substantial investment that their investors make. If those who have the know-how can be lured away by a competitor, why bother investing in a tech start up?
The Government is currently considering the responses to the call for evidence and policy is not yet known. If the Government does ban restrictive covenants, employers will want to ensure that confidentiality and intellectual property clauses are watertight, include longer notice periods (with garden leave) and consider how long term incentive arrangements can best be structured to tie key personnel into the business.