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Do non-compete clauses limit innovation?

Non-compete clauses restrict ex-employees from working for a competitor, soliciting or dealing with existing clients, or from starting a competing business for a set period – often several months.

Designed to safeguard the commercial interests of businesses, these clauses are used to protect organisations from the threat of departing directors and senior employees.

However, the Department for Business, Innovation and Skills has announced a ‘call for evidence’ on whether the addition of post-termination restrictions in employment contracts act as a barrier to employment, innovation, and entrepreneurship.

While restrictive covenants are designed to protect the interests of employers, the law recognises that ex-employees do need to make a living. Should a dispute arise, the courts will only enforce such clauses if they go no further than is reasonably necessary to protect a legitimate business interest.

Ultimately, there is no one-size-fits-all policy when it comes to restrictive covenants. Legitimate business interests may include trade secrets and confidential information, customer data and connections, and the stability of the workforce. What is deemed to be reasonable will depend on the nature of your sector. In any dispute, the court will look at a number of factors to determine whether a restrictive covenant is reasonable including:

  • The breadth of activity covered by the restrictions
  • The size of the geographical area the employee is prevented from operating in
  • The timescale of any restrictions
  • The role and seniority of the employee compared to the extent of the restrictions
  • Standard practice within your industry.

Of course, employers will want to defend their commercial position and are likely to argue that, on balance, the protections applied by the court ensure that the competing interests of employers and employees are evenly balanced.

However, if the majority of disputes over restrictive covenants do not get to court, and non-compete clauses are being used by employers as a deterrent, then there may be some weight to claims that they hamper the efforts of start-ups and small businesses.

With the government now seeking views on whether such restrictions have a stifling effect on innovation, you can take part in this consultation process here.

If you are concerned about this, or any other employment law matter, please contact Linder Myers today.

Contact our employment team Read our guide to restrictive covenants
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