As part of the Government’s pledge to make Britain the best place in Europe to innovate and start up a new business, Business Secretary Sajid Javid has announced plans by the Department of Business Innovation and Skills to look into restrictive covenants following suggestions (from whom exactly, we don’t know at this stage!) that they could be hindering start-up businesses from hiring the best and brightest talent.
The theory put forward is that contractual non-compete clauses (which can prevent individuals from directly or indirectly competing against their former employer for a set period and usually within a set area) could be stifling British entrepreneurship by preventing employees from either starting up their own business or going to work for a start-up after leaving a job.
Accordingly, a call for evidence has been launched with Mr Javid stating that he wants to see “…more enterprising start-ups and greater productivity in a free and fair marketplace, by making sure we take action to break down any barriers that are curbing innovation and entrepreneurship.”. Linking this to post-employment contractual restrictions, Emma Jones, founder of Enterprise Nation states that “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”.
But is it really necessary for the Government to weigh into an area in which case law built up over a significant period of time would appear to provide sufficient points of reference in relation to the types of clauses that are likely to be legally enforceable and those that are not?
A recent example of this is the 2013 case of Croesus Financial Services v Bradshaw Restrictive, in which the High Court held that covenants prohibiting an ex-employee from soliciting or dealing with his former employer’s customers for a year post-termination were not an unreasonable restraint of trade. On the facts, the Court was satisfied that the 12-month non-solicitation and non-dealing covenants did not extend any further than was reasonably necessary in order to protect the employer’s business. The Defendants argued that the restrictions were excessive and therefore unenforceable because they applied to all clients with whom Mr Bradshaw had any “personal contact in the course of [his] duties” in the two years before his employment ended. The Court rejected that submission and made the point that the wording only applied to clients whom Mr Bradshaw had personally engaged in more than trivial business contact. Regarding the length of the covenants, the Court commented that 12-month provisions appeared to be standard within that sector. Furthermore, the evidence relating to the strength of relationships between independent financial advisers and their clients supported the Company’s argument that the duration of the restriction was reasonable. The Court also acknowledged that a substantial period of time was required to establish relationships between the ex-employee’s clients and their new advisers, and that this process could not be rushed.
This type of well-reasoned judgment based around an analysis / assessment of whether the clauses in question protect a legitimate interest and are reasonable in the circumstances is typical of such cases. Therefore, the need for government intervention in an area of competing interests, those being an employer’s desire to protect legitimate business interests and the employee’s need to earn a living seems dubious. Surely now there is sufficient consensus on the parameters that need to be considered when drafting contractual restrictions (i.e. geographical scope and timeframe), as well as a general acceptance that proportionality is key, to render this investigation superfluous. Still, when has that ever stopped such initiatives from being instigated?!
At Employee Management Ltd, our HR support consultants provide commercially minded employment law advice and routinely produce bespoke employment contracts that feature tightly worded but proportionate restrictive covenants that actively reduce an organisation’s exposure when key employees leave. We also offer a comprehensive employment tribunal representation service through which we can handle any claims that flow from an acrimonious parting of the ways. If you are an employer concerned about the damage employees in certain positions could do to your business if / when they leave, please feel free to contact us for a confidential, no-obligation discussion.