As a business owner, you value the products and services you are delivering to the market, particularly if they are unique to your business. The last thing you want is for an employee to leave and set up a competing operation. For this reason, many employers include a non-complete clause in employee contracts. A non-compete clause stops your employee from carrying out a particular action for a specified time after their employment contract has ended. For example, an employer may decide to include clauses to prevent:
It is essential that you are aware of the types of covenants or clauses you can include in an employment contract to help protect your business. This article will explain how a non-compete clause works. It will explain what it is, the reason for it and any rules surrounding it. The article also explains potential proposals for changes in the law in the UK regarding non-compete clauses.
A non-compete clause (also known as a restrictive covenant) in an employment contract that restricts an employee from carrying out a job in competition with yours once they leave your business. It also restricts them from poaching employees or clients from the business. This can include working for a competitor or working self-employed, for example, starting a business very similar to the one the employee had worked in.
The restriction will remain in place after the employment contract has ended, for the time specified in the employment contract.
You can also place a non-compete clause in a settlement agreement. A settlement agreement is a legal contract between you and your employee. It is often in place as the relationship ends and can contain a promise such as an amount of money for your employee or to treat them fairly in the future.
In addition to the obvious use of a non-compete clause as a way to protect a business from direct competition, you can also use these clauses as a way to:
As an employer, you should be aware that your employee is not obliged to agree to have a non-compete clause in their contract and may want to negotiate. However, if it is essential to your business to have a non-compete clause in the employment contract, you could insist or ultimately withdraw the offer of employment.
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A non-compete clause should contain the:
It should also be titled as a ‘restrictive covenant’ or ‘post-termination restriction’ so it is clear to the employee exactly what it is.
You may not be able to enforce your non-compete clause if it contains unreasonable terms. For example, if the length of time it is in place for is excessive.
A court may also not enforce a non-compete clause if it is considered too broad or unnecessary for the business’ interests.
Where a non-compete clause is enforceable, and your employee breaches it after they have left their employment with you, the ordinary course of action to take would be to:
Whilst you can still use non-compete clauses in employment contracts, the government is considering making changes to the law regarding these. These changes would be in response to the effect of the COVID-19 pandemic on the economy. The Government recognises that non-compete clauses can act as an obstacle to workers finding employment or starting their own business. Indeed, it may compete with the job they previously worked in, thus preventing innovation and competition.
The UK government, therefore, carried out a consultation on this area of employment law between 4 December 2020 and 26 February 2021 to find out the views of the general public on this.
Non-compete clauses are useful post-termination restrictive clauses that you can use as an employer, which will protect your business by preventing direct competition. However, you must understand how to use a non-compete clause. For a non-compete clause to be enforceable, it must be only as wide as is necessary to protect your business. Additionally, you should ensure that you include specific information in any non-compete clauses in your contracts, including the dates and geographical locations for which you want to limit your former employee’s business activities.
This article has explained:
If you need help understanding non-compete clauses or keeping up to date with any imminent changes in the law in this area, our experienced employment lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. So call us today on 0808 196 8584 or visit our membership page .
In 2021 the UK government consulted the public about proposed changes to the law on non-compete clauses. They asked for views on the possibility of putting rules in place with non-compete clauses, including requiring them to be accompanied by compensation. The UK government is currently reviewing the results of their consultation.
Where might an employer include a non-compete clause?Non-compete clauses are usually found in an employee’s employment contract or an employee’s settlement agreement.
