Why ‘ridiculous’ non-compete clauses are alarming British businesses
Non-compete clauses in contracts are designed to prevent employees taking vital information or contacts to rival organisations. They are frequently used in professional services firms, or with high-performing sales staff. And now, they’re being rolled out to the people who prepare your lunchtime bap.
Employees at the US chain Jimmy John’s Gourmet Sandwiches were surprised to be asked to sign contracts stating that on leaving the snack dispensary’s employ, they are unable for two years to join any nearby business that earns more than 10 per cent of its revenue through sandwiches, wraps or rolls. So broad is the covenant that it could apply across 6,000 square miles and 44 states.
It’s easy to assume such excess is restricted to the other side of the Atlantic. But there’s every sign highly restrictive covenants are increasingly appearing in the UK. Ed Stacey, a partner at PwC Legal, says he is seeing a large number of “ridiculous and overly restrictive” non-compete clauses, particularly when it comes to duration and geographical reach.
“We have seen clauses preventing former employees from competing for a period of five years, and restrictions preventing former employees from working for any client of the employer, anywhere in the world,” he says. He notes a recent example that sought to prevent someone from being “an employee, manager, officer, director, agent, consultant, contractor or partner… in any competing company.”
Such clauses normally won’t stand up in court, says Stacey, as their remit is too broad to protect an employer’s specific legitimate business interest, while unfairly restricting employees’ future prospects.
And as Louise Fisher, HR director for Xerox Europe, points out, it obscures the often valid reasons businesses use non-compete clauses: “IP and other proprietary knowledge is extremely valuable to organisations, and it must be protected from other companies using it.” Whether that role is controlling competition, solicitation, dealing or poaching, restrictive covenants protect businesses from having their hard-won ideas, key relationships and staff taken from them.
Fisher says that when they are specifically focused on valid concerns, covenants should be welcomed. But are they being used in cases where no proprietary knowledge is likely to be involved? Anecdotally at least, that seems to be the case, and it could be a problem for employers and staff alike.
In a relationship-based industry, such as recruitment, years of work can be invested to gain clients’ respect, trust and business. As a result, says Samantha Hurley, head of external affairs & compliance at the Association of Professional Staffing Companies, being able to restrict an ex-employee’s access to recent client accounts is “essential” to prevent them simply walking away with business.
However, the prevalence of these clauses doesn’t actually mean they are enforceable. To hold water, restrictive covenants must refer to a clearly defined protectable interest. In court, proving that interest has been diminished in terms of sales or opportunities, specifically by the ex-employee using their prior knowledge or contacts, is easier said than done.
It is best to get a clause written for you, or not to use one at all. A recent Court of Appeal decision, in Prophet Plc v Christopher Huggett, demonstrated that the court was unwilling to rewrite badly written covenants. And a recent verdict from the High Court stated that covenants agreed at the outset of an employment contract carry forward. This means that even if a junior employee’s role is unlikely to see them encountering, let alone owning, major client relationships or intellectual property, a poorly thought-out clause will be unenforceable if they later get their hands on more sensitive parts of the business.
Few businesses regularly ensure contracts of employment are tailored to the individual in this way, Stacey says, and one-size-fits-all covenants are easy to unpick. Gardening leave offers one solution for distancing departing employees from IP and clients without putting them back on the market, but when it goes on too long, employees can convincingly argue their career is being unfairly stifled.
Kay Phelps, founder and director of PRinHR, isn’t ditching covenants any time soon. “They need to be there for some businesses and people as a safety net,” she says. “However, far before signing a contract, I aim to make sure I’m working with people who have a good sense of respect and trust.” That way, she says, the contract remains just a safety net, not a threat. Or, she adds, you could just heed the words of Richard Branson: “Train people well enough so they can leave, treat them well enough so they don’t want to.”