Can a Non-Compete Clause be Enforced?

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).