Non-competes: The unreasonable case for reform

Insights / / Non-competes: The unreasonable case for reform

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For the second time in four years, a Conservative Government has begun consultation on ways to reform post-termination restrictions in employment contracts.  I would urge anyone with an interest and experience to respond to the Government directly before the 26 February 2021 deadline.

We have been here before. The debate in England as to whether an employer can restrain former employees after termination has been ongoing since at least 1414, when a judge ruled in favour of one John Dyer, apprentice. Dyer's master had sought to prevent him from working in his chosen trade for six months after his apprenticeship ended. The judge was having none of it. “In my opinion, you might have demurred upon him that the obligation is void, inasmuch as the condition is against the common law; and by God, if the plaintiff were here, he should go to prison until he had paid a fine to the King”. That the plaintiff had not bothered to turn up to the hearing to pursue his case against the erstwhile apprentice probably worsened the temper of the judge, but the presumption was clear. Mr Dyer should be free to pursue the livelihood of his choice.

Today the rule in England and Wales is that non-competes are unenforceable unless they are shown to be no more restrictive than reasonably (my emphasis) necessary to protect the employer’s legitimate business interests, but the Government appears to have itchy feet. Its last consultation on the topic began only in 2016, following which the then Theresa May Government published its findings barely two years ago in its 2018 response to the Taylor Review of Modern Working Practices, concluding that no action to reform non-competes was needed. 

The Government’s 2018 response acknowledged that most responses to the earlier consultation confirmed that restrictive covenants were a valued instrument that allowed employers to protect their business interests. It also found that they did not unfairly impact on an employee’s ability to move jobs. However, the Covid-19 crisis has seemingly prompted the Government to revisit the issue and propose two options for reform:

  1. Make non-competes enforceable only when the employer pays compensation for the period that the employee is stopped from working for a competitor; and 
  2. Ban non-competes completely.

Other jurisdictions differ from our approach. In the US, many of the States, including California, ban non-competes, and a requirement for compensation in return for such a restriction has long been the case in Germany.

To my mind, there is a case for reform, but this is not addressed in this latest consultation. A lawyer’s clients, both on the employer and employee side, like certainty. “Is this covenant enforceable” is a straightforward question that deserves a straightforward answer that is, all too often, too difficult to safely give.  

Any decent lawyer knows that the dreaded "it depends" response to a straightforward client query is to be avoided wherever possible, but non-competes are bedevilled by that question that crops up all the time in employment law - what is “reasonable”? Like the “reasonable adjustments” of disability discrimination and the range of “reasonable responses” in unfair dismissal law, it is often difficult (in a practical sense) to advise with any certainty whether a restriction is the minimum in terms of duration and scope that an employer might “reasonably” require to protect its legitimate business interests. The best a solicitor can often do is “probably” or "probably not". It becomes legal services as bookmaking.

In the 20 years, I have been a practicing employment law solicitor, dozens, if not hundreds, of legal letters, have crossed my desk threatening injunctions and other heavy-handed remedies against departing employees accused of breaching non-competes. The number of such threats that made it to court I could count on the fingers of one hand – maybe two if I include the ones that settled after issue but before a hearing. 

The uncertainties for both employer and employee are often too great to take the litigation risk. Commonly either the employer decides that the risks of a court finding their non-compete unenforceable, and having to pay significant costs to a former employee, are too great, (this is particularly true of SMEs) or alternatively the employee, upon whose shoulders the cost risk is normally far greater, meekly agrees to undertake to abide by the restrictions. Often letters are just ignored. It was not surprising to me that until 2019’s Tillman v Egon Zehnder Ltd the UK’s highest court (whether in its pre-2009 guise of the House of Lords' Judicial Committee or today’s Supreme Court) had not looked at the topic for around a century.

This is, I accept, anecdotal. But the results of the Government’s last consultation confirm there is no appetite for an outright ban, and to simply add a requirement of payment (how much? how long?) to current tests of enforceability would just add another layer of complexity to a law that desperately requires simplification. For example, a binding rule, even a guideline beyond the current rule of thumb, providing that no non-compete that lasted longer than the contractual notice period offered to an employee could be enforced, would be a start. It is time that we begin to prune back the tyranny of “reasonableness” from employment law.

Martin Pratt

Martin Pratt Partner, Head of Employment & Immigration

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