How Does a Non-Compete Clause Work in the UK?

As a business owner, you value the products and services you are delivering to the market, particularly if they are unique to your business. The last thing you want is for an employee to leave and set up a competing operation. For this reason, many employers include a non-complete clause in employee contracts. A non-compete clause stops your employee from carrying out a particular action for a specified time after their employment contract has ended. For example, an employer may decide to include clauses to prevent:

• solicitation;
• poaching;
• dealing; or 
• directly competing.

It is essential that you are aware of the types of covenants or clauses you can include in an employment contract to help protect your business. This article will explain how a non-compete clause works. It will explain what it is, the reason for it and any rules surrounding it. The article also explains potential proposals for changes in the law in the UK regarding non-compete clauses. 

What is a Non-Compete Clause?

A non-compete clause (also known as a restrictive covenant) in an employment contract that restricts an employee from carrying out a job in competition with yours once they leave your business. It also restricts them from poaching employees or clients from the business. This can include working for a competitor or working self-employed, for example, starting a business very similar to the one the employee had worked in. 

You can also place a non-compete clause in a settlement agreement. A settlement agreement is a legal contract between you and your employee. It is often in place as the relationship ends and can contain a promise such as an amount of money for your employee or to treat them fairly in the future. 

Why Use a Non-Compete Clause?

In addition to the obvious use of a non-compete clause as a way to protect a business from direct competition, you can also use these clauses as a way to:

• protect confidential information such as trade secrets and client lists;
• protect the stability of a business’ workers and clients; and
• protect third party interests.

As an employer, you should be aware that your employee is not obliged to agree to have a non-compete clause in their contract and may want to negotiate. However, if it is essential to your business to have a non-compete clause in the employment contract, you could insist or ultimately withdraw the offer of employment.

What Information Should a Non-Compete Clause Contain?

A non-compete clause should contain the:

• date when the clause comes into effect;
• duration which the clause covers;
• geographical area the clause relates to; and
• compensation relevant to the clause.

It should also be titled as a ‘restrictive covenant’ or ‘post-termination restriction’ so it is clear to the employee exactly what it is.

Can I Enforce a Non-Compete Clause?

You may not be able to enforce your non-compete clause if it contains unreasonable terms. For example, if the length of time it is in place for is excessive.

Where a non-compete clause is enforceable, and your employee breaches it after they have left their employment with you, the ordinary course of action to take would be to:

1. request that they refrain from the activities they are in breach of, which could include you writing to their new employer to make them aware of the clause;
2. write a letter to the former employee to tell them you intend to seek a restraining order; or
3. apply to the court to prevent the employee from continuing to engage in actions that breach the non-compete clause. However, you must be sure that you have evidence that their actions could cause significant damage to your business. Where successful, you may recover your legal costs from the former employee.

What is the Current Position on Non-Compete Clauses?

Whilst you can still use non-compete clauses in employment contracts, the government is considering making changes to the law regarding these. These changes would be in response to the effect of the COVID-19 pandemic on the economy. The Government recognises that non-compete clauses can act as an obstacle to workers finding employment or starting their own business. Indeed, it may compete with the job they previously worked in, thus preventing innovation and competition.

The UK government, therefore, carried out a consultation on this area of employment law between 4 December 2020 and 26 February 2021 to find out the views of the general public on this.

Key Takeaways

Non-compete clauses are useful post-termination restrictive clauses that you can use as an employer, which will protect your business by preventing direct competition. However, you must understand how to use a non-compete clause. For a non-compete clause to be enforceable, it must be only as wide as is necessary to protect your business. Additionally, you should ensure that you include specific information in any non-compete clauses in your contracts, including the dates and geographical locations for which you want to limit your former employee’s business activities. 

This article has explained:

• what a non-compete clause is;
• why you might want to use this type of clause;
• what a non-compete clause should contain; 
• how to ensure this type of clause is enforceable; and
• proposals which may change these.

If you need help understanding non-compete clauses or keeping up to date with any imminent changes in the law in this area, our experienced employment lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. So call us today on 0808 196 8584 or visit our membership page.

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