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How do you feel about the Government’s call for evidence on Non-Compete clauses in restrictive covenants?

There is a lot of hype in the press at the moment that the Government is “banning“ restrictive covenants. But have you read the Department for Business Innovation and Skills (“BIS”) Call For Evidence on non-compete clauses?

I think that much of the hype is scaremongering from those who have either not read the document, or who are jumping on a bandwagon. It’s not a long document, and I will attach the link to this blog, but it is worth a read if you have an opinion on the subject.

It starts by saying that the Government wants to explore whether non-compete clauses can unfairly hinder workers from moving freely between employers, and from developing innovative ideas, translating those ideas into a start-up, and growing their businesses. But before Recruitment Directors throw their hands in the air at the thought of all their Consultants going off and starting up in competition, it goes on to say that the Government is mindful of the fact that there are situations in which non-compete clauses are valid and serve a useful purpose. The example they cite is when those clauses restrict employees from immediately working for a direct competitor.

So I think it is clear to say that this is not an outright ban. Not least, the Government simply cannot do that overnight & invalidate employment contracts. What the Government is actually looking to do is gather evidence about non-compete clauses to establish whether they unnecessarily limit the movement of talented people.

In recruitment, restrictive covenants are widespread. They are not always appropriate or enforceable, but you’re unlikely to come across a Consultant’s employment contract that doesn’t contain them. They will usually cover non-solicitation of clients, candidates and employees; the database of contacts; and more recently, LinkedIn. Most will include provisions preventing working with a competitor; some will go further and restrict the geographical area. Some Recruitment Directors are vicious in their enforcement of them, others are more laid back.

It was the Social Market Foundation’s report called Venturing Forth in July 2014 that recommended that the Government considered banning non-compete clauses from employment contracts. They carried out a small survey which found that restrictive covenant clauses can act as a barrier to workers leaving a business to start their own business in the same field. The Government’s aim with this Call For Evidence is to gather evidence on how non-compete clauses are currently being used, and what the impacts are.

The BIS document is actually at pains to state that it is not referring to Confidentiality clauses or Intellectual Property (“IP”) clauses, just non-compete clauses. IP rights will still protect Recruitment Company’s legitimate business interests because the law of confidence prevents outgoing Consultant from using their previous employer’s confidential customer lists.

In addition, trademark and passing off law prevents the outgoing Consultant stating that they have a connection with their previous employer’s business. And copyright law prevents the outgoing Consultant from copying written work created by them in the course of their further employment. The Government is not attempting to restrict those laws.

So how would you feel if your IP and Confidential Information remained protected, but your outgoing Consultant could work for a competitor as soon as they left your Recruitment Company?

What the Government is looking at is whether your former employee can work for a competing business, have dealings with your former clients and candidates, hire your employees, or set up business in a specific geographical location.

I wonder how the remaining restrictions alone could be enough. Your IP and Confidential Information may be safe, but if the outgoing Consultant can contact clients and candidates, that sounds pretty pointless to me.

If you have an opinion, I would strongly urge you to respond to the Call For Evidence, or forever hold your peace! There are certain questions that can be answered in relation to your experience of restrictive covenants.

As well as whether non-compete clauses restrict entrepreneurialism; the other areas the Government are honing in on are whether employees understand the implications; and whether employers actually understand their purpose and use appropriately. This is something that I have blogged on previously.

In the conclusion of the BIS document it states that the Government wants to ensure that people are not unfairly restricted either for moving freely within the labour market or from creating new enterprises and start-ups. Thankfully it also states that it is important to protect business interests and ensure that businesses can survive as a going concern. If you want to have a say on how you need to protect your legitimate business interests, it is in your commercial interest to respond to the Call For Evidence. You have until 19 July 2016.

I’m not entirely sure how the Government would effect that a restriction on the use of non-compete clauses. Perhaps they will write it into employment law. Whatever happens, it won’t happen overnight, so this may be a useful time to revisit the restrictive covenant clauses you have in your employment contracts, to make sure that they don’t go any further than protecting your legitimate business interests. If the clauses are wider than is reasonably necessary to protect those business interests, they become restraint of trade clauses, and they won’t be enforceable now let alone in the future.

If you need any further information on this or if Cognitive Law can be of any assistance, please do not hesitate to get in touch with Lucy Tarrant on 0333 400 4499 or lucy.tarrant@cognitivelaw.co.uk . Otherwise, thank you for reading this blog.