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CAROL DAVIS COMMENTS ON THE BIS CALL FOR EVIDENCE ON THE USE OF RESTRICTIVE COVENANTS IN EMPLOYMENT CONTRACTS

Ah, so that’s how BIS defines ‘non-compete’…

Carol Davis comments on the BIS call for evidence on the use of restrictive covenants in employment contracts

I’ve checked the date and, nope, it’s definitely not 1 April 2016. I’ve pinched myself and it hurt which suggests that I am awake and not dreaming. The bank holiday weekend was only tolerably warm so it is unlikely that I am suffering from sunstroke. It must be therefore that the BIS Call for Evidence into Non-Compete Clauses which came out on Wednesday, 25 May 2016, is not the product of my befuddled brain but it is actually a real document with serious intent. All of which leads to the inescapable conclusion that the Department for Business, Innovation and Skills ("BIS”) is utterly oblivious to the well-developed body of law relating to restrictive covenants.

At the end of last month BIS announced plans to look into whether or not post-employment non-compete clauses stifle innovation, particularly for start-up businesses, by unfairly hindering workers from moving freely between employers, and from developing innovative ideas and translating those ideas into a start-up and growing their businesses. Quite what BIS meant by the term ‘non-compete clause’ was unclear from the initial announcement. Well, we now have clarity, at least up to a point. It is now clear that the call for evidence relates not just to pure non-compete clauses, but to "any clause in an employment contract that seeks to restrict a worker’s ability to compete against their former employer after they leave”. However, quite why BIS currently considers that restrictive covenants stifle innovation is unclear.

The justification for calling for evidence appears to be limited to a report published by the think-tank the Social Market Foundation in July 2014 (‘Venturing Forth: Increasing high value entrepreneurship’) which, according to BIS, recommended that the Government considers banning non-compete clauses. This is only partly correct. In fact, the recommendation that non-compete clauses be banned was just one of a package of recommendations put forward in the report, the purpose of which was to analyse what might be done to encourage more of what the report authors termed ‘high value entrepreneurship’. Based on its research, the SMF report identified that there were a number of barriers which tended to dissuade ‘high value entrepreneurs’ from entrepreneurship, the top barriers being: concerns about the risk to household income; the perception that access to finance is too difficult; a belief in lack of skills and knowledge and concern about the impact of potential failure on future career. The SMF report concluded that the Government could and should use its legislative and fiscal powers to kick-start the growth in ‘high value entrepreneurship’ and put forward a package of recommendations, the first of which was to ban non-compete clauses in employment contracts. The other recommendations were that the government:

  • Champions the use of flexible working to start a business;
  • Monitors for any signs of bias in the granting of flexible working requests linked to whether the employee intends to start a business;
  • Legislates to introduce a ‘right to return’ for employees leaving a company to start a business, with the detail subject to the results of a feasibility study on how to maximise the policy’s effectiveness; and
  • Reinstates tax reliefs for corporate venturing, at a comparable level to reliefs available under other investment schemes.

Whilst the SMF report makes interesting reading, I have to confess to having one or two problems with it, not least that the authors of the report seem as oblivious to the established body of case law relating to restrictive covenants as BIS. The authors are critical of restrictive covenants because they "effectively enforce a gap in income by forcing ex-employees to wait a certain period of time before their new business can start trading”. However, this fundamentally misunderstands the point of restrictive covenants. A restrictive covenant will only be enforceable if it is designed to protect a legitimate business interest and goes no further than is reasonably necessary to protect that interest. The point of a restrictive covenant is to prevent an ex-employee from abusing his/her former employer by, for example, stealing confidential information, using his/her position of influence gained during employment to solicit customers of his/her former employer or destroying the stability of his/her former employer’s workforce by poaching key employees. In essence, an enforceable restrictive covenant is not designed to prevent competition per se but only unlawful and unfair competition. Arguably, there is no gap in income to the ex-employee who starts a new business without seeking actively to undermine the business interests of his/her former employer by exploiting information and influence gained during his/her former employment.

The second problem that I have with BIS relying on the SMF report is the limited nature of the research conducted. The research comprised two components, the first a qualitative study of employees to understand attitudes and barriers to entrepreneurship; and the second, a public poll to understand the most important factors preventing individuals from deciding to start a business. However, the qualitative study appears to have had a mere 30 participants and although the public poll received 8,220 responses, not a single question asked in the poll expressly related to restrictive covenants.

Not to be put off by the old adage ‘if it ain’t broke don’t fix it’, BIS calls for evidence in seven particular areas. In the Call for Evidence:

  • Questions are asked to ascertain what is currently understood by the term ‘non-compete clause’;
  • Questions are asked to understand whether restrictive covenants are particularly prevalent in specific sectors and roles, such as higher skilled roles in science or tech based jobs;
  • Specific examples are sought from employers who have used restrictive covenants, including where action was taken to enforce them;
  • Specific examples are sought from employees about how they have been affected in the past by restrictive covenants; and
  • Questions are asked to establish the extent to which employers and employees and their advisers understand restrictive covenants and consider that they may hinder mobility and enterprise.

We are told that the questions are being asked because:

"The Government wants to build our evidence base on how non-compete clauses are currently being used, and what the impacts are. We want to ensure that when used, they are justified, well-constructed, targeted and reasonable. There needs to be a balance which ensures the employer can protect its business interests when staff move on and the worker is not unfairly disadvantaged when they decide to leave or start up their own business.”

How very laudable. Of course there should be a balance between the interests of an employer in protecting its business interests and the interests of the ex-employee wishing to move on and strike out on his/her own. Equally, it is absolutely right that it is only those restrictive covenants that are justified, well-constructed, targeted and reasonable that should be upheld. However, as the responses to the BIS call for evidence may well point out, all these aims and desires are already met by the common law. There is a considerable body of case law that has grown in this area over the years to ensure that the law does precisely what the Government seems to want it to do, namely that it goes no further than is reasonably necessary to protect an employer’s legitimate business interests. It is difficult to fathom how this vast body of case law could be captured in guidance or codified in a way that would be either workable or desireable. One has to ask what possible point there is in seeking to reinvent the wheel.

The closing date for responses to the call for evidence is 19 July 2016 and responses can be submitted either online HERE or by completing a response form and emailing it or writing to the Labour Market Directorate of BIS. I am currently torn between completing a response form and simply sending BIS a copy of ‘Employment Covenants and Confidential Information: Law, Practice and Technique’ by Selwyn Bloch QC and Kate Brearley which provides a definitive guide to the law in this area and should tell the Government everything it needs to know.


 

Posted: 31.05.2016 at 16:10
Tags:  Comments  Employment Law  Injunctions  Articles
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