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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.

 

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