What is a non-compete clause and why is it important to get it right and protect your business from employees going to competitors? Toby Pochron, Senior Associate at Freeths LLP, is here to explain.
What is a non-compete clause?
A non-competition restriction (or non-compete clause) prevents an employee from joining a rival employer for a defined period after termination. In the UK and further afield, non-compete clauses are often viewed as "the most powerful weapon in an employer's armoury” – however, courts will always seek to balance the rights of an employer to prevent unfair competition and the rights of an individual to trade freely on an open market.
Drafting an enforceable non-compete clause
When enforcing a non-compete clause, it is important to note that any contractual term restricting an employee's activities after termination is void for being in restraint of trade and contrary to UK public policy, unless the employer can show that:
- It has a legitimate proprietary interest that it is appropriate to protect; and
- The protection sought is no more than is reasonable having regard to the interests of the parties and the public interest
An employer cannot impose such a clause simply because it does not want an ex-employee to compete with it. However, it can seek to prevent the individual from using or damaging something that legitimately belongs to it. To determine what rights may require protection, the employer must look at the nature of its business and the employee's role in it.
In deciding whether to enforce the restriction, the court will consider all the circumstances including the employee's seniority, status, and the fact that they were involved in negotiating the wording of the restrictions at the time they entered into them. As good practice, therefore, non-compete clauses should be:
The court will not allow the employer to seek to protect more than what is reasonable. If the clause is drafted too widely (e.g. its duration or scope is excessive), the courts will be unwilling to enforce it. It is therefore important that the clause is precise and identifies exactly what the employer is seeking to protect.
Non-compete clauses should be tailored to the specific employee and the role they perform. So when drafting, the employer should look at each employee and determine what level of protection is reasonably necessary in each case. The fact that the employer distinguishes between two employees on the same level may help to persuade the court that it has genuinely and reasonably sought to protect its interests.
So, a non-compete clause should be part of an employee's contract or another document tailored to them, which you should share with them and keep in a secure yet accessible place such as an online document management system.
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The reasonableness of a non-compete clause is judged at the time it was entered into (what may be reasonable when a senior person left may not be reasonable when they signed the covenant as a junior employee). They should therefore be regularly reviewed to ensure they are up to date with and relevant to the employee’s position.
Of a reasonable duration
How long should a non-compete clause last? The duration of the clause is also likely to be a key factor when determining reasonableness. Too long and they will be unenforceable – keep them as limited as possible. For example, don’t stick in a worldwide covenant for 10 years if your turnaround of customers is every 3 months in a 1 mile radius.
The burden of proving that a non-compete clause is reasonable falls on the party trying to enforce it. The employer will need to be able to show why the clause provides adequate protection, but does not go further than is necessary to protect its legitimate interest.
Related article: How to create great HR policies as an SME
Enforcement of non-compete clauses
If an employer has reason to believe that an employee has breached their post-termination restriction, the most common remedy sought is an injunction prohibiting the employee from joining the competitor.
Injunctions may be granted as either:
- Interim relief, prior to the commencement of or during proceedings
- Final relief at trial
The court will generally grant an injunction only if the employer could not be adequately compensated by damages. In restrictive covenant cases, this will often be the case because the claimant is unable to identify, or prove, that particular damage had been suffered as a result of the unlawful activity, or because substantial future damage is likely to occur in the absence of an injunction.
Demonstrating loss of profit or opportunity
Where an employer claims a financial remedy or damages for breach of restrictive covenants, the employer will need to show some loss resulting from the breach. This will normally be loss of profits on contracts or opportunities diverted by the employee. Where the employee has been induced by the employer's competitor into breaching the restrictive covenant, the employer might choose to sue that employer (particularly as the competitor company may have greater financial resources from which to pay any award of damages made).
In deciding whether to award damages for breach of a restrictive covenant, the court will consider:
- Whether the covenant was enforceable
- If so, whether the employee had breached the covenant
- If so, whether that breach had caused the employer loss
- If so, how that loss should be assessed
Assessing the cost of enforcing a non-compete clause
If an employer suspects that an employee has breached or may breach a restrictive covenant, first they should assess the damage/likely damage. Enforcement action can be expensive and therefore, if the employee’s breach is unlikely to be significantly detrimental to the business, less expensive options (e.g. sending a letter to the employee and/or their prospective employer warning them of the employee’s obligations and asking for an undertaking) may be preferable.
The employer should also seek advice as soon as possible on the prospects of the restrictions being enforceable, and whether action should be taken. Acting without delay will increase the prospects of the court enforcing the restrictions and help reduce the prospect of the employee causing further damage to the business.
An injunction is an equitable remedy, granted at the discretion of the court. There is always a risk that the court will not grant an injunction, even if the covenant concerned is reasonable, as it may decide that the employee's breach can be compensated by other means, such as damages. The court will also consider the competing interests of the parties when exercising its discretion.
When an interim injunction is granted, the employer is almost always required to give an undertaking in damages. This is an undertaking to the court to compensate the defendant if it is subsequently determined, at trial, that the applicant was not entitled to the injunction.
Related article: Employment tribunals: the costs for employers
Recruiting employees from competitors
Recruiting employees from competitors can be an effective alternative recruitment strategy, but this needs to be done very carefully. Here are a few steps employers can take to minimise their risk of any liability when considering whether to hire someone from a competitor:
- During the interview, inform the candidates that you expect them to comply with their contractual obligations during and post their employment with their current employer
- Remind the candidate of their obligation not to take any confidential information or trade secrets from their current employer
- Be sure the successful candidates agree in writing that during their employment with you, they will not use or disclose any confidential information or trade secrets of their former employer
Setting out these expectations early in the recruitment process can significantly reduce the chances of any issues arising after the individual is employed by you. Equally, in the unfortunate circumstances of a claim by the former employer, taking these steps can significantly reduce any potential exposure you may have from hiring the employee from a competitor.
Related article: SME recruitment: 5 ways to do it better
Overall, non-competition agreements require very specific wording and content to be enforceable. Therefore, before attempting to insert any such clause into an employee contract, it would be advisable to check with your lawyer to ensure that your employment contracts are legally compliant and enforceable, so that your business interests can remain fully protected. Without proper consideration, you may end up with a clause that is unlikely to hold up in court and a whole load of wasted time and money trying to get there.
Written by Toby Pochron
Toby Pochron is a Senior Associate in the Freeths LLP Employment Law department. He was a Partner in the Employment Law department of Ironmonger Curtis.