Government calls for evidence on whether “red tape” of non-compete clauses stifles innovation
The Department for Business, Innovation and Skills has announced that it will be asking for evidence on whether employment rules, and in particular non-compete clauses, are stifling opportunities for start-ups and entrepreneurial businesses to innovate and grow. The call for evidence is due to be launched shortly and will be asking for views from individuals and employers on this issue.
It is unclear where this idea has come from and the Government’s announcement simply states that there have ”been suggestions” that these clauses hinder start-ups. The press release refers to non-compete clauses which are aimed at preventing individuals from setting up in competition with a former employer or working for a competitor for a set period of time after their employment ends and also non-solicitation clauses which prevent a former employee approaching clients for a set period of time. Although the Government considers that these clauses constitute “red tape” it disregards the established legal right of businesses to protect their valuable interests, such as confidential information and customer connection. Businesses will be rightly alarmed by the suggestion that employees whom they train and in whom they investment could leave and set up in competition taking clients and business without proper protection.
Whilst courts are reluctant to enforce the most onerous form of non-compete clauses, they recognise that it is appropriate to do so where it is “necessary” to protect an employer’s legitimate business interests. It seems the Government is considering depriving employers of protection even where the courts would currently recognise that such protection is necessary, rather than merely desirable.
Whilst the devil in this proposal is readily apparent rather than being buried in the detail, how such arrangements might operate in practice is fraught with difficulties. For example, how would a start-up be defined? Could this be used as a means for larger organisations rather than genuine start-ups to circumvent non-compete and non-solicitation restrictions? Would the start-up itself be able to include restrictions itself in its contracts with senior individuals - or will the start-ups similarly be vulnerable to its staff leaving to compete? If so, will start-ups be discouraged from taking on the inherent risks of a fledging business? Will anyone be prepared to provide the essential capital to do so? Will the proposals also outlaw employers form making bonus, stock or other incentive payments conditional on employees observing non-compete clauses or using compliance with such clauses to determine good or bad leaver status?
The call for evidence will generate strong views. In the meantime, employers should protect their legitimate business interests whilst they are able to do so.
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