Non-compete agreements, often found in employment contracts, seek to stop ex-employees from working for a competitor, often leading to disputes.
In May 2023, the Government proposed restricting the enforceability of these agreements to three months after an employee's departure.
In this article, we take a deep dive into non-compete agreements, also known as restrictive covenants in employment contracts, including what they are, when they’re used, and how they may be enforced.
What is a non-compete agreement?
A non-compete agreement is a part of employment contracts, service agreements, or partnership/shareholder agreements that limits what someone can do during or after their association with a business. They are also sometimes called restrictive covenants, restraint of trade, or conflict of interest.
Most commonly, non-compete clauses are included in employment contracts to prevent workers from competing with their former employer after leaving. The aim is to safeguard an employer’s confidential information, market share, and customer relationships for a specific period and work alongside provisions for protecting confidential information and intellectual property.
What is usually included in a non-compete agreement?
In the UK, there’s no statutory definition for non-compete agreements. However, they must protect legitimate business interests and be reasonably necessary, guided by the common law principle of “restraint of trade.”
Non-compete clauses typically include restrictions like:
Joining a competing business, or starting their own;
Interacting with the previous employer’s customers;
Hiring staff from the former employer;
Launching a business in a geographical area that could disadvantage the ex-employer.
Non-compete agreements also commonly feature:
An agreed timeframe in which the employee is bound after employment ends;
A specific geographic region or area;
A defined field or market;
Clear definitions of the type of work or services covered by the agreement;
A list of competitors or industry descriptions;
Stipulated damages for breaches.
Non-compete clauses may also be accompanied by gardening leave, where workers don’t go to work during their notice period but continue to receive their salary and any other benefits. Furthermore, these restrictions usually stay in effect even after the employment contract ends, whether it’s due to the employer terminating the contract or the employee resigning.
What are the different types of restrictive covenants?
Non-compete clauses can be lengthy and contain specific definitions and restrictions including:
Name | Explanation |
Non-competition clauses | Prevent a worker from joining or starting a competing business within a defined geographic area and timeframe after leaving the current employer. |
Non-solicitation clauses | Prevent a worker or employee from soliciting or dealing with the former employer’s clients or customers for a specific timeframe. |
Non-dealing clauses | Prevent workers from dealing with a former employer’s clients, even if the clients approach them without any active efforts to attract them. |
Non-poaching clauses | Prevent workers from luring former colleagues away from an employer to join a new company. |
Non-disclosure clauses/Confidentiality clauses | Prevent workers from disclosing or using sensitive information, trade secrets, and proprietary knowledge after leaving a company. |
In which industries are non-compete agreements most common?
Lots of companies now include non-compete agreements as standard in their contracts, even for junior employees.
However, they may be more common in certain industries and areas such as financial services, information technology, and manufacturing, or for more senior job roles.
Are non-compete clauses legally enforceable?
Non-compete clauses are sometimes used by employers to prevent certain behaviors, but their enforceability can vary. For them to be valid, they need to be reasonable and necessary to protect a legitimate business interest, established when the employee signs it, not when they leave.
Courts assess whether these clauses effectively protect business interests like trade connections and confidentiality. Mere claims of increased competition won't suffice. Success in enforcement depends on the specific wording and when the employee signed the clause, especially if it was upon leaving.
Factors like job influence, geographical scope, duration, and business nature influence the legal enforceability. While past cases provide insight, each situation is unique, and there's no fixed rule, as contract terms can be negotiated between employers and workers.
When are non-compete agreements not enforceable?
Non-compete agreements must be reasonable at the point of signing. If they’re too bread in scope or duration and prevent someone from earning a living, they may become unenforceable.
What happens if an employee breaks a non-compete agreement?
Violating a non-compete agreement constitutes a breach of a legally binding contract. As such, if an employee breaches this agreement, the employer can seek an injunction if the agreement is considered reasonable.
Court appeals may lead to the ex-employee being directed to leave their new job or cease competing with the former employer. Employers may also pursue financial compensation for actual losses due to the breach, although proving these losses can be challenging.
Alternatively, disputes can often be resolved outside of court through mutual agreement between employers and employees
Examples of non-compete agreements
Here are three sample non-compete clauses tailored for different roles in the UK. Remember, these are just examples, and it's crucial to consult with a commercial solicitor to ensure they fit your specific situation:
For employees
In consideration of your employment with [Company] and the confidential information you will have access to, you agree that for 12 months following the termination of your employment, you will not directly or indirectly engage in any similar business, provide similar services, or work for any competitor within a 10-mile radius of [Company]’s main office.
Translation: After you leave the company, please don’t work for or start a similar business nearby for the next year. We want to protect our confidential information and keep things fair.
For workers
As a worker at [Company], you agree that during your engagement and for period of 6 months thereafter, you will not undertake similar work for any competing business, either as an employee or as a contractor. This includes offering your services directly to our clients or any clients you worked with during your time at [Company].
Translation: While you’re working with us, and for 6 months after, please don’t do similar work for our competitors, even if you’re doing it as a freelancer. Also, don’t take our clients with you.
For Directors
As a director of [Company], you acknowledge the sensitive nature of our business strategies and agree that for 24 months following the termination of your directorship, you will not be involved in a competing business in any capacity, whether directly or indirectly, within the European Union.
Translation: Being a director means you’ll get to know a lot of inside information. When you leave, please don’t go and work in a similar business in any role for the next two ears, specially within the EU.
What are the advantages of non-compete clauses?
In the main, non-compete agreements make sure a business’s interests and innovations stay protected even after a worker leaves.
Their main benefit is that they help safeguard confidential information. In some cases, it could be argued that non-compete clauses also reduce employee turnover, which in turn saves employers costs associated with hiring and training new staff.
What are the disadvantages of non-compete clauses?
Non-compete agreements are intentionally used to stop workers from competing with their former employer for a certain time, including limitations on approaching clients or working for a competitor after leaving.
While this has obvious benefits for the employee, for the employer, these kinds of clauses can prevent them from starting or growing innovative businesses. Therefore, one of the main drawbacks of non-compete clauses is they unnecessarily limit the movement of talented people in an economy where skills and experience are crucial.