Should former employees be free to compete with their former employers?

It is not uncommon for recruiters to move on to set up their own recruitment businesses, but they can be prevented from doing so by their employers.
 

Jul042016 for blog

It is not uncommon for recruiters to move on to set up their own recruitment businesses, but they can be prevented from doing so by their employers.

The Department for Business, Innovation and Skills has launched a call for evidence to gather views on whether new start up businesses are potentially being held back by ‘non-compete clauses’ in employment contracts.

The consultation states: “The Government wants to explore whether non-compete clauses can unfairly hinder workers from moving freely between employers, and from developing innovative ideas, translating those ideas into a start-up, and growing their business.”

What are non-compete clauses?

There are various provisions implied in a contract of employment which prevent people from engaging in activities that undermine their employer’s business, such as operating or working for a competing business.

The benefit of these provisions are lost once the employment comes to an end. The only way that an employer can continue to protect its business is by ensuring that there are specific provisions in the employee’s contract which restrict what the (then) former employee will be able to do when they leave the employer. These clauses are generally referred to as restrictive covenants which include the ‘non-compete’ clauses.

They can include restrictions such as preventing the former employee from: • Running or working for a competing business • Enticing the former employer’s customers • Enticing the former employer’s staff to come and work with them/for them.

The BIS call for evidence will consider:

“whether non-compete clauses may be hindering those who might be considering setting up, or have set up, an innovative enterprise – when it is most critical for the entrepreneur to be able to hire suitable staff to help grow the new business.”

How far should non-compete clauses go?

There are already measures in place which limit the use of non-compete clauses. If an employer wishes to rely on them, courts must consider whether there is a legitimate business interest to protect and whether the clause goes no further than is necessary to protect that interest.

Recruitment consultants are likely to be amongst the very individuals that Government has in mind when considering how new start-ups may potentially be ‘hindered’ by the use of non-compete clauses.

However, non-compete clauses are widely used by recruiters in the contracts of their employees, given the need to guard against that very risk of an individual leaving and seeking to poach clients and candidates. The consequences to a former employer’s business can be catastrophic.

This entry was posted on Monday, July 4th, 2016 by:

Lorraine LaryeaLorraine Laryea - Solicitor at the REC