September 25, 2020

The Editor Speaks: More on non-compete clauses

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Colin Wilson2webMy editorial yesterday “Are non-compete clauses fair?” has sparked some interest.

I was referred to this article from Helix Law:

AN UNENFORCEABLE NON-COMPETE CLAUSE DOES NOT LATER BECOME ENFORCEABLE, EVEN IF CIRCUMSTANCES CHANGE

If a non-compete clause is unreasonable, and therefore unenforceable when the employment contract is signed, it does not later become enforceable if circumstances later change making it reasonable, the High Court has ruled.

In 2000, an employee was recruited at a salary of £35,000, and his employment contract required him to give one month’s notice if he left. It also contained a non-compete clause to the effect that he could not work for a competitor within 12 months of leaving.

In 2005, following various promotions, he signed a variation of his terms of employment stating his new salary to be £80,000 and increasing his notice period to three months, but otherwise stating that “all other terms and conditions outlined in my original documentation remain unchanged”.

In April 2012, he gave three months’ notice that he was leaving to work for a competitor. His employer summarily dismissed him and applied for an injunction to stop him working for the competitor for 12 months, relying on the non-compete clause.

A non-compete clause is not legally enforceable unless it is reasonable. Whether or not it is reasonable should, under current law, be decided by reference to the circumstances at the time it was entered into.

The employee argued that when the non-compete clause had been entered into, a 12-month prohibition against working for a competitor was unreasonable given his relatively junior status. The employer countered that his acknowledgement in 2005 (that terms and conditions in the original documentation remained unchanged) meant the non-compete clause was agreed to afresh and, given his seniority at that time, the 12-month prohibition was reasonable and enforceable.

The High Court ruled that if a non-compete clause is unreasonable and therefore unenforceable at the time it is entered into, that is the end of the matter. The fact that the clause would have been reasonable if the employee had agreed to it at some later date, when his circumstances had changed, does not mean it is then revived or resurrected as on that date. That the employee had agreed his ‘original terms and conditions remain unchanged’ did not help the employer because, under that wording, a term or condition that was ineffective and unenforceable in the original documentation remained so.

Recommendations

Employers should review the reasonableness of non-compete and similar clauses every time an employee’s duties change and/or they are promoted, to ensure they remain enforceable in the new circumstances. If in doubt, the employee should be asked to agree to new clauses.

Case ref: PAT Systems v Neilly [2012] EWHC 2609 (QB)

SOURCE: http://www.helix-law.co.uk/blog/51-an-unenforceable-non-compete-clause-does-not-later-become-enforceable-even-if-circumstances-change

The reader also makes a point regarding the employee here who signed the Agreement with the non-compete clause, got a job with another employer, his first employer released him by letting him leave but not releasing him from the clause and his hopefully new employer who wanted him but then changed his mine because of the clause. The man is now without a job.

BOTH his former employer and his prospective employer can be sued by him!

He is right because both actions are unreasonable and potentially unlawful.

The reader ends with, “The problem with nonsense like this is that it gets embedded in employment contracts without anyone bothering to consider the legal issues.”

And THAT was the whole point of yesterday’s editorial.

Another article sent to me on the subject:

CAN A NON-COMPETE CLAUSE BE ENFORCED?
Posted by Charles Dalton-Moore From templateAgreements
From time to time the question arises: is it worth having a non-compete clause in an employment contract even if it’s probably not enforceable? Non-compete clauses are popular as ever, with an estimated 68% of all employment contracts in the UK containing such restrictions, however many employers are unaware of the complications involved in using them.

RESTRICTIVE COVENANTS
A non-compete clause in an employment contract is one of the most common types of restrictive covenants. Given the nature of any typical employment, an employee is likely to have access to privileged information and relationships unlike any external competitor. A departing employee clearly has a head-start if they decide to exploit this advantage to compete with the employer later, and even more so if the employee had an influential position at the firm and the resources and capability to take business away from the firm.

Currently, our director service agreement template contains a number of restrictive covenants as standard, although we always advise customers to seek additional professional legal advice as to the appropriateness of such restrictions in their particular case. In contrast, our contract of employment template does not contain any restrictions as standard, mainly due to the difficulty of getting a court to enforce them for ‘standard’ employees.

ENFORCEABILITY
The difficulty with non-compete clauses, from an employer’s point of view, is that as with any part of a contract of employment, employees have a number of statutory rights, regardless of what the contract says. In this case, if an employer wants to enforce a non-compete clause, they need to be able to convincingly prove in court that such clause is absolutely necessary to protect a ‘legitimate business interest’. Simply proving that the employer will suffer from ‘more competition’ is not counted as a ‘legitimate business interest’.

WHAT WILL A COURT CONSIDER?
It is worth noting that if a non-compete clause is found to be disproportionately restrictive, a court may rule that parts of it are invalid, and the remainder is enforceable. In order to decide if or which of the non-compete clauses in a contract of employment are reasonable, a court is likely to consider the following:

What is the job and the influence of the employee? A judge will take in to consideration whether or not by the nature of the employee’s role they are able to gain a significant or unfair competitive advantage.
What is the geographical area at stake? This must be reasonable, for example a hairdresser could not legitimately enforce a non-compete clause across the whole of the UK, but they may be able to in their local vicinity.
How large is the employer’s business in comparison? A judge will take size in to account to assess the impact of the competition and also to determine whether or not the former employee could even work at all if they were restricted (i.e. if the employer is too dominant).
How long do the restrictions last? When an employer makes their case for the protection of the ‘legitimate business interest’, such legitimacy needs to last the full duration of the restriction, not just apply at the time of the court case. Lengthy restrictions (i.e. longer than 12 months) are often very difficult to enforce.

CONSEQUENCES
Although it can be difficult to enforce non-compete clauses in a contract of employment, if such clauses are enforced either in part or in full, the consequences for the employee can be significant. An employee who breaches or intends to breach a non-compete clause, should consider the following:

An employer might seek an injunction from the court, preventing the former employee from trading or working (if doing so breaches the non-compete clause). If for example the former employee has set up their own business, it could be game over.
An employer might sue the former employee for any losses caused as a result of the breach, plus legal fees, which could be very expensive.
If the former employee has taken up new employment (which leads them to breach the non-compete clause) the new employer could be liable which could lead to dismissal.
SAMPLE CLAUSES
If you want to see a sample of these restrictive covenants, you can take a look at our sample director service agreement page (section 20).
GO TO: http://templateagreements.co.uk/blogs/articles-and-resources/8331936-can-a-non-compete-clause-be-enforced

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