The Government is currently considering proposals to reform the use of non-compete clauses in employment contracts. It's looking at a number of options, including banning them altogether, restricting their duration and requiring the employer to pay the employee during the non-compete period. The Consultation ends on 26 February 2021. It refers to removing barriers to innovation (non-competes being unenforceable in California is often cited as a factor behind Silicon Valley's success). Those with long memories may recall that the Government consulted about similar proposals a few years ago, but they ended up going nowhere. It remains to be seen whether these proposals also end up gathering dust or result in legislation.
In the meantime, a recent High Court case is a reminder that the courts scrutinise non-compete clauses carefully and that employers looking to enforce them need to provide persuasive evidence of why they are necessary.
It concerned a financial adviser, employed by Quilter Private Client Advisers (Q), who resigned during her probationary period. She spent her two-week notice period on garden leave and then joined a competitor, in breach of a nine month non-compete clause in her employment contract. She was also subject to non-solicitation and non-dealing clauses in relation to clients.
At trial, the High Court ruled that the non-compete covenant was not enforceable, on the basis that it went further than reasonably necessary to protect the interests. The Court held that Q had put forward "very little evidence indeed" to justify the length of the covenant, although it sought to justify it as necessary to protect client relationships.
Interestingly (and worryingly for many employers), the Court stated that one reason for not enforcing the non-compete was the fact that the employee was subject to a 6 month probation period during which her employment could be terminated on 2 weeks' notice. This made it foreseeable that her employment could end after she had been employed for only a short period of time and yet she would still be subject to a 9 month non-compete restriction, despite having had very little time to build relationships with any clients.
This was an unusual approach by the Court and seems to leave employers with a dilemma. When courts consider whether to enforce a restrictive covenant, they have to assess whether the covenant was enforceable at the time the employment contract was entered into. This case therefore suggests that in any case where employment can be terminated on short notice during a lengthy probation period, the employer may be unable to enforce a non-compete (since it would make no difference whether the employee had in fact been employed for years and now had a longer notice period).
One solution could be to enter into a new employment contract once the employee had passed their probation (although the employer would need to identify adequate "consideration", or payment, for the new contract). Alternatively employers could set out two tiers of non-compete clauses, a shorter one applying during the probationary period and a longer one afterwards. However, all these approaches have downsides, including uncertainty as to how a Court would deal with these and the risk that the employer would forget to get a new contract signed (a frequent problem in practice).
It appears possible that this case will be appealed, given the Court's unusual approach. Also, cases in this area are fact-sensitive and this case does not necessarily indicate how a Court would approach a similar scenario for a different employer. Certainly, the apparent lack of evidence justifying the restriction in this case will not have helped the employer, which spent around £500,000 in legal fees on a case which has set a very unhelpful precedent for it in any future disputes. Employers should take care (and specialist advice) when introducing restrictive covenants in employment contracts, and when seeking to enforce them.
Want to hear more from us? 
