What are the alternatives to non-compete restrictions?
In December 2020, the UK government launched a consultation on reforming post-termination non-compete restrictions to encourage more competition in the employment market.
Currently, it is looking at two main options. The first is to make non-compete restrictions enforceable only if the employer pays the former employee for the duration of the restriction. The second is to ban non-compete restrictions altogether.
If the second option is chosen and a ban is imposed, what other strategies can businesses use to protect their interests? We consider the position below in the UK and California, where non-compete restrictions are already banned.
One alternative is to place an employee on gardening leave during their notice period. During this time, the employee will continue to be employed and paid in the usual way; however, they will typically be required to cease work and not to contact clients or colleagues.
In short, gardening leave protects employers’ interests by keeping employees out of the marketplace, away from confidential information and reduces the opportunity for the employee to persuade colleagues and clients to follow them.
To place an employee on gardening leave, the employee’s employment contract must give the employer the express right to do so. The length of the gardening leave also needs to be appropriately tailored to the employee’s role and level of access to confidential information as, if it is too long, it will likely be considered unenforceable by a UK court.
Non-compete covenants in the UK a timeline:
An alternative means of protecting business interests is through deferred remuneration (such as share option grants), where part of an employee’s remuneration is delayed and paid out upon certain conditions being achieved, such as an employee remaining in employment for a certain period of time and/or not leaving for particular reasons.
A distinction will often be made between ‘good leavers’ (i.e., those departing for approved reasons such as retirement) who will receive the deferred remuneration, and ‘bad leavers’ (i.e., those departing for non-approved reasons, such as to join a competitor) who will forfeit the deferred remuneration.
More generally, other types of post-termination restrictions, such as those preventing the solicitation of clients or employees, and confidentiality obligations, can be helpful to reduce the risk of disruption by former employees.
In the event of a breach, employers can apply to the UK courts for an injunction to restrain the former employee from breaching a restriction and/or damages to compensate them for any loss incurred from such breach.
California’s alternatives to non-compete restrictions
California has a long-standing policy of severely limiting the use of restrictive covenants in employment agreements. As a result, legal advisors have developed alternative means to protect business interests.
Post-employment non-compete agreements are invalid in California, with very limited exceptions. Notably, recent decisions by senior California courts have called into doubt the enforceability of employment agreement clauses that prevent departing employees from soliciting colleagues. However, with the correct drafting, clauses preventing departing employees from soliciting customers may still be used.
Businesses in California use other methods to protect their interests. Confidentiality agreements which require former employees to not disclose or use trade secrets or other confidential information are enforceable.
Remedies are available if an employee breaches an enforceable post-employment agreement, such as using a company’s client information to engage in unfair competition. California case law supports the use of injunctive relief such as a court order restraining a former employee from continuing a prohibited act.
Another form of relief is damages aimed at compensating a business for the loss incurred by an unfair act.
The UK consultation is the first step in what is likely to be a long process and businesses will likely be keeping a close eye on developments.
Alex Denny is partner at law firm Faegre Drinker