36 law
Protecting business interests when an employee moves on
So, you own your business (or may be just a small piece of it). You’ve worked hard at building your business. One of your employees leaves to join a competitor, taking part of your business with them. It is going to be more than a little irritating for you. If you’re one of our clients you will probably be calling us and asking what you can do about it, writes Robert Frampton, solicitor, employment department, Herrington Carmichael
The Government, through the department of business, innovation and skills (BIS) has, however, made a “call for evidence” on whether particular “employment rules” stifle small business and innovation. In particular, the consultation sought views on “non- compete clauses” that could prevent an individual from starting their own business.
A non-compete clause is a type of post- termination restriction that prevents an individual joining a competitor once their employment has ceased. There are many types of post-termination restriction that prohibit individuals from undertaking certain acts. Normally, we recommend that these are specifically tailored to each client. However, to name a few, clauses can prevent:
• Soliciting clients or employees; • Dealing with clients; or • Interfering with suppliers.
The principal behind such clauses is that, to be enforceable, an employer must justify that they are in place to protect its legitimate business interests. For this reason, post-termination restrictions are often limited to a specific industry, a geographical area or a period of time after termination. Their purpose is not to punish an individual for leaving employment but to protect the business they are leaving.
A non-compete clause, which is specifically referred to in the BIS call for evidence, is the most draconian of all post- termination restrictions. Taken at face value, its enforcement could, in particular circumstances, prevent an individual from making a living. Often their very inclusion can pose enough of a threat to deter an individual from taking any action that may come even near a breach of this obligation.
Taking the Government’s approach in calling for evidence, we can see, from advising senior individuals, how small businesses searching for talent can be stifled by post- termination restrictions. We are often asked to advise businesses who are looking to
businessmag.co.uk
recruit individuals who are subject to post- termination restrictions. If the individual has agreed to post-termination restrictions, there are risks for the new employer including:
1 A non-compete clause may prohibit the individual from joining you at all;
2 If you are recruiting the individual for their client following or connections with suppliers (for example), they may be unable to bring these to your business; and
3 If the individual acts in breach of their restrictions, the former employer could pursue your business for inducing a breach of contract. Costly litigation in the early stages of a small business is almost always best avoided.
These factors may seriously discourage a small business offering roles to talented individuals who could help to grow their business. Hence why there may be some merit in the Government considering whether this type of clause should be controlled.
However, even a small business can benefit from having these post-termination restrictions in their employment contracts. Well drafted contracts are not just for multinationals and PLCs.
Indeed, many of
our small businesses clients, impose post- termination restrictions. Arguably, losing a key individual is more damaging to a small business then it would be a multinational. Having post-termination restrictions gives the business a period of time in which it can strengthen relationships with clients, employees and suppliers to prevent them following the departing individual. A non-compete clause is designed to ensure that the departing individual cannot just immediately seek to compete; it provides a business with time.
Further, post-termination restrictions should not be punitive and if that is there only purpose they are likely to be unenforceable. An enforcing party must show that the
THE BUSINESS MAGAZINE – THAMES VALLEY –JULY/AUGUST 2016
restriction they are seeking to impose is reasonable to protect its legitimate business interests. Imposing a ban on ever obtaining future employment is very likely to be unenforceable. Therefore, by their very nature, non-compete clauses should only go so far as is necessary and should not unduly stifle business. A clause that goes too far will be unenforceable.
From a practical perspective, the real issue is that it can take lengthy (and in some cases costly) litigation to determine whether a clause is unenforceable which, in itself, could stifle business. This is a flaw in the system, as opposed to a problem with the current law surrounding post-termination restrictions.
In conclusion, although it is good to review and debate the effectiveness of employment practice, it is difficult to see a world where hard earned business should not be protected. Non-compete clauses can provide a business, of any size, with essential protection. However, these should always be carefully reviewed to ensure that they remain effective and enforceable. We eagerly await the outcome of the consultation.
For further information on the issues addressed in this article or the enforcement of post-termination obligations, in general, contact Frampton:
Robert Frampton 0118-9898150
robert.frampton@
herrington-carmichael.com
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48