Consultations and proposed reforms have done little to outline the evidence relied on to demonstrate how non-competes impact perceived low job mobility and innovation, which is said to constrain productivity and appear to be a driver behind proposed reforms. Clients in a number of industries, such as financial services, the fintech sector and the insurance sector (which are not known to complain of lack of innovation), use non-competes and are unlikely to favour a ban.

Start-ups, especially in a knowledge economy, also need to protect themselves from employees leaving and setting themselves up in direct opposition, which appears to have been overlooked by the proposals. Non-compete clauses are seen by many start-ups as a way to stop a big competitor raiding their workforce, taking all their best employees and all of the confidential information that those employees hold as a result of their time spent in the business, and are important in securing necessary investment.

Some have commented that relaxation of restrictions on non-competes would benefit big tech who see hiring teams from smaller competitors as a cheaper alternative to acquiring a competitor. Non-competes are regularly associated with investment in talent both through training and through salaries. It allows employers to give employees more access to the company’s intellectual property than they would if a non-compete was not in place.

The comparison of the regime in California (where the tech innovation hub of Silicon Valley is situated and which bans use of non-competes), which sees lengthy and extensive disputes over the misuse of confidential information, is widely regarded as unsound without further interrogation.

The timing and detail of the proposals remain limited at this time. It may be that more detail can be expected when the Budget is announced later this month.

 The current regime

The flexibility of the courts and fact sensitive nature of their approach strikes a balance of worker mobility with investor confidence/business stability, which is likely to be difficult to replicate in legislation. Specialists in the law regarding employee and partner competition champion the court, which does an excellent job in ensuring protection goes no further than necessary to protect legitimate business interests such as protecting confidential information (typically the justification for non-compete clauses). The reality is that if a non-compete clause is too long or otherwise too restrictive then it gets overturned by the courts.

Most practitioners would accept that covenants can be used as a deterrent and misuse can deter movement, particularly for some lower paid workers, where costs and risk associated with challenge can be a barrier, but there are less draconian solutions. Many would acknowledge that there is value in some reform, in particular, to police abuse in relation to lower paid employees where covenants are used for deterrent effect even if they are unlikely to be enforceable. Procedural reform may assist with fairness of outcomes where urgent injunctive remedies are sought. It is recognised that the enforcement process at an early stage can favour an employer where the court has limited information and there is a relatively low bar to persuade the court it must intervene to stay potentially unlawful competition pending resolution of the underlying dispute. While the determination of issues can usually be undertaken on an expedited basis, the costs and risk involved are significant.

 Risks of the out-right ban proposal

It is hoped that the detail will grapple with the risk that the abolition of non-compete clauses may, in fact, have the contrary effect to what is intended in some industries. Investment may be stifled or deterred where confidential information regarding new products, services and strategy is capable of walking out the door soon after it is developed. There is also the risk of unintended consequences. We may see notice periods, which have, historically, been harder to challenge, lengthen, and employees spending more time in the garden. Gardening leave is typically even more restrictive (and easier to enforce) than restrictions which sit outside of employment. We would also likely see a shift in focus to indirect covenants with the right, for example, of employers to retain significant deferred remuneration in the face of competitive activity.”

The solution

This is the fourth time in 10 years the Government has looked at non-competes so it seems set to happen. Historical proposals have included a statutory duration cap, an outright ban and salary based threshholds to protect lower paid workers who are not in a position to challenge restraints.

Other solutions such as security for an employee during any period of restraint, an increase to the hurdle to secure interim injunctive relief and statutory sign-offs regarding awareness and meaning of covenants have all been floated as potentially less draconian reforms, and worth revisiting to ensure a balance of the competing concerns.