Departing employees and non-compete clauses: an employer’s guide

Your commercial interests may be vulnerable if an employee resigns, to work for a competitor. Before that happens, it is prudent to take steps to protect your business. This would be to ensure that employees are prevented from taking confidential information, such as pricing strategies, bids, or confidential research. You should also guard relationships with clients or suppliers, that would be exploited.

‘In the employment contract, employers often include restrictions, known as restrictive covenants, stipulating what an employee can do with information and contacts gained during their employment,’ says Sam Welham, an Associate Solicitor in the Employment Team at Barker Gotelee. ‘However, even if a former employee could damage your business, there are limits on the restrictions, and also on how far you can prevent the employee from competing with you.’

Sam Welham explains non-compete clauses, when they are binding, and other options to protect your business.

What are non-compete clauses? 

Non-compete clauses are one of a range of restrictive covenants, that may be included in an employment contract. A non-compete clause is a prohibition on the departing employee from working for a competitor, or setting up in competition.

The restriction is for a specified time after leaving your business and may also only apply within a specific geographical range.

When are non-compete clauses binding?

Courts will only enforce a non-compete clause if it is appropriately worded and reasonably necessary.

Otherwise, it is treated as a restraint of trade, which unreasonably restricts your former employee from taking up new opportunities. In these circumstances, it would be unenforceable.

When deciding whether or not the clause is binding, the court will consider the duration, any geographical range, and the type of activity which it seeks to restrict. These will be considered in the context of the interests you need to protect, the nature of your business, typical restrictions used in the sector, together with the information and contacts the employee has gained.

To increase the likelihood of the restriction being binding, the restriction should be as narrow as possible. This may mean being very specific in the wording describing the type of business, with which the employee should not compete.

To be enforced by a Court, the effect of the clause must not go beyond protecting your legitimate business interests, such as valuable client connections.

The restriction might prevent the individual working in their chosen profession for a limited time. If that is the case, you must be able to show the detrimental impact on your business, if the restriction is not enforced.

What are the other options to protect your business? 

A non-compete clause has a significant impact on the individual. Traditionally, it has been harder to enforce a non-compete clause, than other restrictions.

Other restrictions include:

• non-solicitation: not approaching or contacting former clients or suppliers, to start a business relationship on behalf of a competitor;
• non-dealing: not dealing with a former client or supplier, even if they initiate contact with the former employee, rather than the individual connecting with them; and
• confidential information: not misusing or disclosing confidential information belonging to your business

There is another approach, which can be used in conjunction with restrictive covenants. This is to ensure that there is a long notice period in the employment contract, with the option to place the employee on garden leave during the notice period.

Exercising you right to place the employee on garden leave, prevents the employee from working for competitors, restricts some or all their activity, and can stop contact with key clients or suppliers.

This allows confidential information to go out of date and client relations to cool. It reduces the damage the employee can do, if they can work for a competitor. Garden leave clauses must also be reasonable to be enforceable.

How we can help 

For further information, please contact Sam Welham in the Employment Team on 01473 617 348 or email [email protected]. Our employment solicitors are here to help.

The article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.