The loft of my home is not somewhere that I venture on a regular basis, but out of the blue I decided to tidy it up.
Deep in the darkness I found a box, well more of a chest with all the paperwork from my past career. We are talking about everything, every offer letter, performance appriasal and even every pay slip from my entire career.
Apart from it being interesting to see just how little I was paid in today’s terms for quite a lot of responsibility most of this paperwork made a quick journey to the shredder. Amongst all the papers for each job there was also a restrictive covenants detailing what I was allowed to do after leaving that employer.
Although I don’t think I ever broke these covenants it got me thinking: just how enforceable are restrictive covenants?
London law firm Mishcon de Reya tell me that UK entrepreneurs believe that restrictive covenants or non-compete clauses as they are also known are vital for protecting their fast growing companies, and that changing the law to remove them would have a negative impact.
The Mishcon de Reya research was prompted by a Government call for opinions and evidence about restrictive covenants that could impact employment legislation.
In April 2016 former Business Secretary Sajid Javid opened a call for evidence seeking the views of businesses and entrepreneurs on whether clauses that prevent an individual from competing against their former employer are stifling opportunities to innovate and grow.
Mr Javid wanted to identify if this type of restrictive covenant is acting as a barrier to innovation and employment, and therefore preventing start-ups from prospering.
Asking the question has created something of a shockwave as differing opinions are aired.
I have seen candidates refuse to sign an employment contract because of the restrictive covenants that it contained on their future employment. I have also seen employers attempt to enforce a non-compete clause with great passion without success. It seems to be an area that employers, employees need to understand better.
Entrepreneurs, say Mishcon de Reya have several concerns:
- with uncertainty already rife post Brexit, 73% of entrepreneurs also say restrictive covenants are important in attracting and retaining investment which is vital to UK growth.
- most entrepreneurs (93%) feared that ex-employees would be able to steal clients after leaving employment.
- almost three quarters (73%) were worried about retaining confidential company information.
Interestingly, while every entrepreneur saw restrictive covenants as valuable assets in protecting their business only two fifths (40%) of them who have been personally subject to a restrictive covenant believe that they are enforceable.
Mike Patterson of Berwins solicitors in Harrogate told me that he would have expected this figure to have been lower (than 40%). This is simply because non-compete clauses are often poorly drafted and do not properly reflect the role of the employee, and the business interest of the employer that they are seeking to protect. Basic errors can include an unreasonable post-employment time period (more than 6 months) and undefined geographical area.
Marie Walsh of Consilia Legal questions the effectiveness of restrictive covenants. they normally act as a deterrent to former employees either soliciting or dealing with clients or poaching valuable staff. Entrepreneurs, she says are rarely put off from starting a venture because of a restriction in their previous employment contract, and indeed if they are truly entrepreneurial why would they need the contacts and staff of a previous employer?
The survey of employers also revealed that employers think that
- over a third (38%) believe a lifting of current restrictive covenants would result in reduced investment in UK companies.
- over 4 in 5 (83%) employers found restrictive covenants valuable in protecting their business
- limiting such clauses could put businesses at risk as they fear clients would be taken (81%), staff poached (79%) and valuable confidential information lost (50%).
Jennifer Millins, partner in Mishcon de Reya’s employment department said that the courts are already adept at striking a careful balance between an employer’s right to protect its business and an individual’s freedom to work. The Government’s call for evidence, she says, appears to reflect a very one-sided view of restrictive covenants. Our poll shows that the protective qualities of restrictive covenants cannot be downplayed, and that UK business and entrepreneurs value their ongoing existence. At this stage, it is difficult to see how legislation in this area will be beneficial to UK businesses”.
Mike Patterson agrees, whilst there is always the risk that non-compete clauses are open to challenge and potentially unenforceable – he says that they can act as a valuable deterrent to employees to make them stop and think twice about the potential consequences should they decide to leave their current employer and go and work / set up in competition and/or solicit key customers and staff. Therefore, employers of all types should continue to be able to rely on them and include them when needed in employment contracts.
Overall and on balance, Mike doesn’t think that the introduction of new legislation to restrict the use of non-compete clauses will be of benefit to UK businesses and has the potential to create more uncertainty than there already is, as to what can and can’t be relied on.
Marie raises a very practical issue, enforcing a restrictive covenant or non-compete clause is as expensive as any other type of legal action. Many of the enquiries that Marie receives from businesses refer specifically to post termination restraints and their enforceability, however when the issue of injunctions and fees arise particularly legal and court fees the vigour with which these issues are pursued is lessened. Probably 7 of the last 10 instructions she has had in this area have resulted in a letter before action but were then not progressed further on account of the potential costs. Unless the breach causes a significant loss many companies will simply not pursue it further.
It is also worth remembering that for legal action to be successful the claimant must demonstrate a financial loss. If that is proven and damages are awarded the prospects of recovering compensation might as Marie says be poor because of the net worth of any new start up or the employee.
It all seems to make a lot of sense. As an employer you want your employees to respect the value of the information they handle and the relationships that the business has with other employees, customers and suppliers.
There is a case for these types of clauses but they have to be appropriately written and if you are thinking about having them as part of your terms and conditions or employment then you also have to decide if you would be prepared to enforce those clauses. If you don’t enforce them for every employee can you enforce them for any employee