Are non-compete restrictive covenants enforceable?

An employer will often seek to protect its business by including post-termination restrictions (PTRs) in its contracts of employment. These seek to prevent employees dealing with the employer’s clients and employees for a period of time after termination of employment.

Some PTRs also seek to prevent employees from competing with the employer’s business at all. Because such ‘non-compete’ PTRs are more onerous for an employee, courts are more reluctant to enforce them. The recent actions of governments and their agencies, both in the UK and the US, suggest they too have concerns about non-compete PTRs.

Any PTR will be unenforceable unless:

1. it seeks to protect a legitimate business interest of the employer; and
2. it is reasonable in its extent.

When considering these factors in the context of a non-compete PTR, the court will first ask itself whether a non-compete PTR is required at all. After all, if the employer has PTRs preventing the employee from soliciting or dealing with its clients and employees, why does it need an additional PTR preventing competition? The answer is that the employer may have a legitimate business interest in either protecting confidential information, which amounts to a trade secret, for as long it has a useful ‘shelf life’ or should the employer be unable to ‘police’ the improper use of such confidential information. In both cases, the restraint must be no greater than reasonably necessary.

To amount to a trade secret, the confidential information to be protected must be distinct from the employee’s own knowledge and experience gained during their employment. The employer will have to explain to a court why the nature of the confidential information requires a non-compete PTR, explain its likely shelf life, the period over which it has been built up – and the expense to the employer of doing this – and the steps the employer has taken to ensure that employees are aware of the confidential information.

If the employer wishes to rely on its inability to police the unlawful use of its confidential information, it will have to explain why it can’t do so. A good shortcut is to set out all this information in the non-compete PTR itself. These points will improve the chances of the employer successfully enforcing the non-compete PTR.

However, even if the non-compete PTR is reasonable, it may still be unenforceable. The employer may only rely on its covenants if they are incorporated into the employment contract. The contract should be signed by the employee and dated. No additional payment or ‘consideration’ is needed when an employee starts work but this will be necessary where PTRs are introduced later in the employment relationship.

If the employer promotes an employee, it should consider whether the employee needs wider PTRs. If they do, the employer should ensure the letter of promotion is clear that the promotion is conditional upon the employee signing a new contract with new PTRs. Why? Because if, for example, the CTO began her career as a lowly data entry clerk, the PTRs that apply to her will be those that apply to the position of a data entry clerk. Such PTRs are unlikely to be wide enough to be relevant to a CTO even if they are, in theory, enforceable.

A judge’s opinion of what is enforceable is increasingly likely to be modified by what governments think is enforceable. Governments are becoming concerned that PTRs restrict competition. The US Federal Trade Commission has recently outlawed all PTRs in US employment contracts. In 2016, the UK government called for evidence on the use of PTRs in employment contracts, citing concerns that such clauses reduce innovation. Most responses suggested that PTRs were valuable and necessary to protect businesses and that employee rights, and the wider public interest, were adequately protected by judges on a case-by-case basis.

Despite this, the government held a consultation about whether the law should be revised so far as non-compete PTRs are concerned. The government published its response to the consultation in May 2023 and confirmed that it would introduce a statutory cap on non-compete PTRs of three months. The cap will only apply to the contracts of employees and workers. For clauses of less than three months the usual principles about enforcement will still apply.

Alternatives to non-compete PTRs include:

• Placing a garden leave clause in the contracts of senior employees and enforcing it. Ensure the clause is long enough to protect the shelf life of confidential information.
• Having claw-back provisions in bonus and commission agreements to ensure good behaviour post employment or to ensure such payments are not due until a fixed period of time.

These options are not without difficulties but, the more comprehensive the range of tools the employer has at its disposal, the more likely it will be able to protect its interests.

For more information about any of the issues covered in this update, or if you need advice in relation to non-compete restrictive covenants for your business then please get in touch with one of our employment law experts today.

This article was first published on People Management’s website.