Non-Competition restrictions in employment contracts

Non-Competition restrictions in employment contracts

The policy of English Law is to permit as much competition as possible.  The Courts of England and Wales are therefore unsympathetic to competition restrictions in contracts including in employment contracts.  The Courts apply a rule that says anti-competition provisions will be interpreted against the person who puts them forward.

A         Service Agreements

A service agreement is jargon for an employment contract for a more senior employee.  Directors of companies will have a service agreement rather than an employment contract.

It is quite normal to find anti-competition provisions in a director’s service agreement.

What is the reason for Non-Competition Provisions?

Companies like to have these provisions because they wish to preserve the goodwill and value of their businesses.  Often the goodwill and value lies in the relationships that the company has with its customers and suppliers.  The company will not want senior employees such as directors to exploit such information if they leave the company.  Companies say that they have a “legitimate interest” in limiting some of the damage that can be done by a departing employee.

What type of Restrictions are available?

The following restrictions are the ones most commonly found:-

  1. Not competing with your previous employer

In this case “less is more”.  We would recommend providing a geographical limitation, for example, so many miles from the office where the individual worked and also a limit in time, for example, for the six months following termination of their employment but no longer.  The extent and duration of the limitations will depend on the facts of the case.  Where the employer can demonstrate a legitimate interest then these provisions may be enforceable.

  1. Not stealing staff

The departing employee is again in a privileged position because they know who works in the company and what their skills are.   We cannot stop an individual from working for a company but there can be some protection against the former employee soliciting and encouraging colleagues to leave.

  1. Contacting old customers

You can find the details of a business on the internet.  However, the departing employee will know exactly which individual is important to each customer.  The departing employee will know about the pricing system used by his old employer and the potential sensitivities of each possible customer.  It is normally possible to enforce reasonable restrictions against former employees soliciting business from its former employer’s customers.

  1. Dealing with suppliers

 In a small number of cases, a departing employee may try to encourage suppliers to the business not to deal with his old employer.  Normally, services can be replaced by other suppliers but in special cases the type of supplier is very important to a business and the departing employee should not seek to undermine this.

 

B         Business and Company Sales

 

Similar restrictions can be found in business and company sales.  From the point of view of the buyer of the business or company, it is very important that the individuals who have sold the company do not go off and compete with it having just been paid for it.  The Courts are normally much more sympathetic to preventing this kind of behaviour.  The argument is that the buyer of the company or the business has paid full value for the business or company and therefore has a greater legitimate interest in protecting the goodwill that they have just bought.  The policy of the law also supports this kind of protection because it does not directly interfere with the employment rights of any individual.

This area is highly complex and is subject to a wealth of case law.  Please contact David Dees or Nick Crook on 01908 662277 for an initial discussion

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