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Particularly adept when it comes to advising on technical and complex employment law problems.

Restraint of Trade Clauses

The headline of the press release is “Government pledges to act on employment rules that could be stifling British innovation”.

Whenever I see such a headline emanating from a government department, my heart sinks. The indication is that something must be done, irrespective of whether ‘something’ is a good idea. This has become a familiar concept amongst lawyers, you can see legal blogger David Allen Green’s satirical view on the ‘Something Must Be Done Act’ here

Beyond the headline, the Department of Business Innovation and Skills (BIS) was announcing (on a Sunday morning as well) a call for evidence regarding ‘non compete clauses’ in employment contracts.

I pause here for a moment to note that the government is pledging to act in respect of something that it is then calling for evidence about. However, let’s put the cynicism aside and look at whether the government has a point.

The drafting of employment contracts takes many forms, often depending on the nature of the employment. Some issue documents which aren’t specifically tailored and have blank spaces that are filled in by hand. Others issue what are known as section 1 statements, seeking to comply with the minimum obligations in s.1 Employment Rights Act 1996. Some employers don’t issue terms at all (ahem). Cue righteous indignation when they discover that they probably cannot do X because they omitted to agree X with the other party to the contract.

Some contracts are drafted with more detailed clauses. Sometimes the drafting is very good, sometimes the drafting is very poor. A poor contract is often one that is contradictory whereby clauses have been taken from a precedent without much thought as to how they apply to the specific employment in question.

Where the contract has been drafted with great care, usually but not necessarily for a senior member of staff the post termination restrictions clauses can be exceptionally complicated. There is no such thing as a ‘perfect clause’ with any clause representing a risk in some form. The basic position is that a court wont enforce a non competition clause unless it seeks to protect a legitimate interest and is reasonable both geographically (where it applies to) and temporally (how long it lasts). If a court refuses to enforce a clause, it won’t write in a less severe clause of its own volition. If a clause falls, it falls.

When the employment relationship is ending, it has also become increasingly common to seek to affirm and in some cases add post termination restraints in any settlement agreement. A specific payment is often made in respect of such clauses in an attempt to increase their enforceability.

My strong suspicion is that the majority of disputes over such clauses don’t reach court. Where the relationship is coming to an end, although temperatures are initially high, after realising the implications (and cost) of a long drawn out fight, a cost/benefit analysis either results in no action being taken or a negotiated agreement. It follows that the collection of evidence in this area is inevitably going to be difficult. Verifiable statistics will be hard to obtain and much of what is said will be anecdotal.

Anecdotes can be fun, but they also cause difficulty. Anecdotes are the route through which we can impart our own biases to reach unjustifiably apocalyptic conclusions. There is always that one person who unfairly dismissed someone ten years ago and still sees it as sufficient evidence for the country going to the dogs and would like you to know that fact. Because of this, it is easy to dismiss anecdotes as a basis for action.

For me, the real difficulty with this call for evidence is over where the source of the complaint has come from. Businesses are unlikely to speak with one voice on this matter. A business will be annoyed by any sort of non competition clause when it is seeking to recruit someone into a role, but as night follows day, when that individual is recruited and asked to sign a contract of employment, that contract will itself contain non compete clauses! i.e. your position on the desirability of such clauses will depend on which stage in the recruitment cycle you are in.

Businesses that wish to protect legitimate interests in good faith seek to do so because if they were not able to protect their position they would have to be looking over their shoulder every five minutes wondering whether their next big idea is going to be taken from them. At the same time, an individual is entitled to earn a living and can’t be expected to remove themselves from the market and forget everything they know simply because they are legitimately attractive on the jobs market.

Therein lies the point. It is about competing interests and those competing interests need to be reasonably balanced against each other. I happen to think that the current balance is a good attempt at achieving that. It is based upon common law principles built up over a number of decades that inherently recognise that one size does not fit all and that the different industries, different sectors have differing realities. Once that balance is disturbed, the most likely effect is increased legal uncertainty and litigation. Employers will always want to defend their commercial position and it will be interesting to see what is produced by the call for evidence.

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