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Call for Evidence Launched on Non-Compete Clauses

on Tuesday, 12 July 2016.

The government has launched a call for evidence asking for views on the impact and use of non-compete clauses to consider whether action is needed to restrict their use to ensure the UK's labour market is competitive, flexible and effective.

What are non-compete clauses?

Non-compete clauses generally prevent individuals from working for a competitor, poaching clients or employees of their former employer, or setting up in competition with their former employer for a specific period of time after leaving an organisation.

They are an important tool for recruitment businesses seeking to protect their business interests and are widely used in the sector.

Such clauses will only be enforceable where they are necessary to protect a legitimate business interest and are reasonable in scope and duration. What is considered reasonable will depend to a large extent on the seniority of the individual's role and the scope of their duties. As matters stand at the moment, it will usually be reasonable to include some form of non-compete clause in the contracts of recruitment consultants (and potentially others in the business).

Impact on Innovation

In May 2016, the government launched a call for evidence seeking views on whether the use of restrictive covenants is a barrier to innovation and employment. The government's aim is to ensure that when non-compete clauses are used they are justified, well-constructed and reasonable to allow for innovation and to support a 'startup economy'.

The call for evidence sought views in the following areas in particular:

  • what is currently understood by the term 'non-compete'
  • whether non-compete clauses are used more widely in certain sectors and roles
  • specific examples from employers who have used non-compete clauses, including where action was taken to enforce them
  • specific examples from workers about how they were affected by non-compete clauses
  • for employers and workers, when non-compete clauses would be useful and/or have hindered mobility and enterprise
  • whether restrictions on the use of non-compete clauses would be useful and/or have unintended consequences
  • whether guidance would be helpful in this area, including on the distinction between non-compete clauses and intellectual property and confidentiality rights

The call for evidence closed on 19 July 2016.

The consultation related to non-compete clauses only. It did not cover the law relating to intellectual property or the use of confidential information.

Best Practice

It remains to be seen whether the consultation will bring about any statutory restrictions on the use of non-compete clauses. Many will take the view that current case law relating to non-compete clauses (i.e. that they only go as far as necessary to protect legitimate business interests) already takes in to account market considerations such as competition and flexibility and should not be interfered with.

It is reassuring to note that the consultation paper recognises the importance of some types of restriction. For example, the introduction states:
'We are mindful of the fact that there are situations in which non-compete clauses are valid and serve a useful purpose, perhaps by restricting workers from immediately working for a direct competitor.'

In any event, this is a useful reminder for recruitment businesses to review their use of non-compete clauses to ensure they are reasonable and focused on protecting the legitimate interests of the business, not on punishing the employee for leaving.

We will monitor developments in this area closely and will inform you of any changes likely to affect your business.

For more information, please contact Michael Halsey on 020 7665 0842.

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