What is a Non-Compete Agreement? Everything to Know
Non-compete agreements are almost constantly in the news- often a point of contention for employees when they later regret signing a new employment contract while for companies they are an effective and important tool. Some people ignore or fail to understand what they have agreed, and find themselves in an incredibly difficult position later.
Here we look in detail at non-compete agreements, including when they’re used, in what industries, and how easy they are to enforce.
What Is a Non-Compete Agreement?
A Non-Compete Agreement is a clause or series of clauses in an employment contract, Directors’ service agreement, Partnership or Shareholder agreement, restricting what a person can do during or after their relationship with the business ends. For sake of simplicity we refer below to employer and employee relationships, and employment contracts, but the other situations these clauses are used are incredibly important (and common). Generally speaking the more senior the person, role, or position, and the more important they are to the business, the more likely it is that they will be subject to non compete clauses. For this reason Directors, Shareholders and Partners will all typically be asked to enter into contracts containing these clauses; they are far from ‘only’ used in an employer/employee context.
In simple terms these agreements intentionally restrict an employee from taking various steps. These can include working for the employer’s competitors in the future, setting up a rival business that could damage that employer’s market position, retaining or using information among other restrictions.
The most common form of restrictive agreement is a clause prohibiting an employee from working for a direct competitor to prevent that competitor from gaining a commercial advantage.
Non-compete clauses typically appear at the beginning of the contractual/employment relationship, and it’s easy for the employee to overlook them. After all, most people are not thinking about their next job when negotiating their current role.
These restrictions are not usually sensitive to how the employment contract ends, whether by employer termination or employee resignation and in most if not all situations the operative clauses will continue to have effect even after the employment, or relationship with the business, has ended.
These clauses should not overly restrict an employee’s ability to find new employment, but what this means, in reality, is usually a matter of interpretation.
There is obvious friction between the competing interests of a company on the one hand that wants to protect legitimate business interests, versus human/civil rights on the other hand- and an employee or person being entitled to choose who and for whom they work. The courts are constantly being asked to decide cases in this area as new ways of working and technology changes throw up new novel issues and factors for the court to consider. Disputes regarding post termination restrictive covenants such as non-compete agreements are incredibly common for this reason.
Contractors and consultants under hire agreements can also be subject to non-compete agreements – not just employees.
Non-compete agreements differ from non-disclosure agreements or NDAs, the latter preventing the employee from revealing information that the employer considers proprietary or confidential.
NDAs, while restrictive in nature, don’t usually restrict employees’ ability to work for competitors.
What are The Components of a Non-Compete Agreement?
Non-compete agreements protect sensitive and confidential data belonging to the employer.
Most non-compete agreements contain similar elements and can include some or all of the following:
- A timeframe during which the agreement binds the employee once the contract of employment has finished, typically six months or one year
- A defined geographical region or area, if that is relevant
- A specific field or market
- The scope of the clause should specify the type of work or services with a sufficient level of detail to identify techniques, procedures, and practices that are unique to the business or proprietary
- A list of specific competitors or a description of the industry and type of business
- Damages the employer is entitled to if the employee breaches the agreement
Most non-compete clauses do not include additional consideration or remuneration to reflect that the employee may be disadvantaged.
When Are Non-Compete Agreements Used?
Non-compete agreements are as essential for start-ups as they are for established businesses. They are widely used in a variety of different companies both well established and newly incorporated.
Non-compete agreements prevent a former employee:
- From working for a competitor company
- Starting a company that offers identical or similar goods or services
- Developing a product in direct competition with their employers
- Recruiting other employees to join their new organisation, although there are different ways to stop this from happening
Numerous examples exist of when a non-compete agreement can protect critical information, intellectual property, or procedures. Here are just a few scenarios.
- The sale, licensing, or patenting of a product or piece of technology
- Protecting a trade secret like the recipe of a branded food product
- Protecting proprietary information like manufacturing processes, suppliers, and client lists – salesmen across a range of industries often sign a non-compete clause to avoid taking customers with them if they leave
- Companies sharing information with marketing partners that will have access to their email addresses, leads, customers, and pixel data
Pros & Cons of Non-Compete Agreements
Non-compete agreements have pros and cons, usually depending on which side of the desk someone’s sitting on; employee versus employer.
Pros
Non-compete agreements are meant to encourage innovation in the marketplace and a degree of transparency between a business, who can be confident their inventions will remain theirs if the employment ends, and employees..
Non-compete agreements protect so-called proprietary information and trade secrets, a plus for the employer.
These clauses also minimise employee turnover, limiting other employment options and reducing the cost to the employer of recruiting and training new staff.
Cons
Non-compete clauses can weaken the position of employees when looking for new work.
In negotiations for more pay with their existing employer, employees are disadvantaged as the employer knows it will be hard for them to go elsewhere.
Employees struggling with post-employment restrictions may end up moving into a new field or industry entirely if they can’t wait for the non-compete clause to expire. This puts them at a disadvantage regarding career progression and salary expectations.
Non-compete clauses are sometimes a blunt instrument and restrict employees who pose no threat to their current employer at all because they don’t have access to information or data which is sensitive or proprietary.
What Types of Industries Use Non-Compete Agreements?
There are specific industries where employees or contractors are more likely to be asked to sign a non-compete agreement because they are more relevant. These include:
- Corporate management
- Manufacturing and product development
- Information technology
- Financial services
The above list is not exhaustive and one of the issues that has arisen in case law includes where these clauses have been used for relatively junior people, restraining them from being able to work elsewhere in the marketplace.
Are Non-Compete Agreements Enforceable?
This is an incredibly complex and technical question. The enforceability of a clause will almost always depend on the specific and precise form of words used. The scope and content of the clause or clauses will be fundamental. Many employers admit they’re only present as a deterrent and may not be legally enforceable, or they may not attempt enforcement.
Typically, the employer must demonstrate that the clause is reasonable and necessary to protect a legitimate business interest and clauses must be very tightly drafted to avoid falling foul of the various traps and pitfalls now established in case law.
The definition of reasonable depends on each case’s specific circumstances and crucially this test is applied when the employee signs the contract, not at the point of their departure. When long-term employees leave, they may have a different status and salary package from when they started and it can therefore be appropriate to renew these clauses during the course of the employment for this reason.
Confusingly but of benefit for an employee, a non-compete agreement which was unenforceable at the point of contractual signing, sometimes years earlier, will remain so even if it has become reasonable in the interim period. For this reason, employers should review and re-negotiate non-compete clauses in the case of staff promotions.
Usually, a specific clause in terms of timeframe and geography is more likely enforceable than something vague and far-reaching. However, each case is unique and considered on its merits. In the context of increasingly hybrid working arrangements where customers may be globally based, it becomes harder and more complex for employers and businesses to draft sufficiently narrow clauses.
Courts often uphold non-compete clauses between six months and two years, providing they don’t fail the reasonableness test for other reasons.
Any court considering a non-compete clause will also review whether there’s a legitimate business interest to protect.
If the employer has asked the employee to affirm a non-compete clause in a separate undertaking when they leave, the employer will find it easier to enforce.
However, if the employee signed an undertaking at the point of departure, then the burden of proof falls on them to demonstrate why this isn’t enforceable.
What Happens if a Non-Compete Agreement is Breached?
Usually, the Courts will decide on an injunction or compensation if the dispute gets that far. Otherwise, the employer and the employee resolve the matter on mutually agreeable terms.
We regularly act for companies and employers nationally in obtaining injunctions against departing/departed employees (shareholders, partners or directors) who have acted inappropriately and where the company needs urgent reasonable protections.
When Are Non-Compete Agreements Unenforceable?
Non-compete clauses are unenforceable if they are deemed unreasonable at the point of signing. Anything that prevents someone from earning a living, such as too broad a geographical area or too long a timeframe, will be unenforceable.
Further, a non-compete agreement that was unreasonable and unenforceable at the point of contract signing does not later become enforceable – even if circumstances change to make it reasonable.
This was the conclusion of the High Court in the case of PAT Systems v Neilly [2012] EWHC 2609 (QB).
This scenario can happen with an employee promotion and increased status, responsibility, and salary. Consequently, employers must review and re-negotiate their employee’s original terms and conditions if they make a promotion.
In December 2020, the UK government began a consultation which ended in February 2021, intending to reform these restrictive clauses. The idea is to promote healthy business activity, nurture start-ups, enhance competition and increase jobs. Many see this as the death knell for non-compete agreements.
Need Advice on Non-Compete Agreement? Contact Helix Law
Helix Law is a specialist firm of litigation solicitors. We offer advice and assistance to employers and companies on commercial litigation and disputes. This includes on an urgent basis where a senior person has left a business and is acting unlawfully, in breach of their agreements with you and/or in a way that may cause harm and longer term damage.
Our specialist litigation team at Helix Law are experienced in dealing with urgent applications and claims, including seeking injunctions and High Court litigation. If any of the issues above are relevant to you contact a member of our team and we will be happy to assist in assessing what options are available to you and how to maximise and protect your position moving forwards.
