What are the basic components of a non-compete in a typical employment contract?
The starting point, rather oddly, is that these types of terms are unenforceable because they are a restraint of trade. An employer needs to make a non-compete clause in an employment agreement reasonable and go no further than is necessary to protect the legitimate business interest. Terms need to reflect the level of seniority and position within the business, more important roles to the business can include more far-reaching covenants. The key is identifying what your legitimate business interest is and then trying to cover that off and limiting to necessity.
Covenants are time-bound and will cover three or four areas:
- Non-solicitation of clients
- Non-solicitation of employees
- Non-interference with suppliers
The level of enforcement follows that order. The shorter the period following termination of employment the better.
Is there a generally accepted reasonable time? Do the courts view six months as being reasonable or is it on a case-by-case basis?
It’s on a case by case basis but if somebody is more senior, they could be looking at 9 to 12 months and for more junior folks much less. My experience lately has been that non-competes get renegotiated on termination of employment. I’m literally finishing one at the moment where the non-compete was agreed at 3 months and the other covenants at 9 months. The other covenants don’t need to have the same periods of time, in fact, it probably helps enforcement if they don’t because it demonstrates that the employer has given this thought. If you are trying to convince a court these things are enforceable you have to show a rational argument behind what you’ve set out.
If somebody is placed on garden leave is that counted in the non-compete period?
An employer can only rely on garden leave clause if it’s originally drafted in the contract. Also, garden leave provisions can only apply for part of or the length of the notice period. Any period spent on garden leave will go to reduce the period of restriction.
In terms of enforcement, is it based on how tight the language is or is it better to be more generic in how you define the scope or competition?
It depends on what your business is doing. You do see organisations list their competitors, the problems there is unless the list is updated frequently, competitors come and go. You could update the list at the time of an annual bonus award for example and because it's very clear, enforcement is easier but if you miss a competitor it’s a lot easier for an employee to argue they aren’t a competitor.
If you take a more generic approach to defining a competitor, the employer must show a legitimate business interest in stopping the employee from working in direct competition with what they’ve already been doing. So if it’s deemed reasonable to protect your legitimate business interest it then falls back on the duration you can keep somebody out.
It's also important to say in the US for example, the court might rewrite a covenant to make it enforceable. In the UK, that's not the case.
So for example, a contract may contain a severability provision and a reasonable non-solicitation clause but an unreasonable non-compete. If the non-compete period is 12 months and the consensus is 6 months is reasonable the UK court will not interfere with that clause, unlike in the US. In that scenario, the non-compete would be unenforceable but the non-solicitation could be enforced.
The US has different rules that apply in different states but for the countries that use English Common Law as the basis of their legal systems, are non-competes similar or very different based on country?
Bit of both. Internationally, non-competes will tend to try and cover the same sorts of things but then inevitably there is always going to be a very local flavour. In Germany, for example, the restrictions are similar but it's required that an employee receives payments throughout the restriction period.
You mentioned people have to be compensated or paid during that period. If you're paid a salary and a bonus do the courts look at your total compensation?
The first thing to say is, as far as the UK is concerned, you don't need to pay for the non-compete. The payment requirement is much more common in a couple of European jurisdictions, as mentioned in Germany in particular. It doesn't really apply so much in the UK.
However, the level of compensation, whether it be salary, bonus, commission etc is relevant because it will be an indicator as to how senior this employee was or how much of a threat they could be to your business. If they've had huge amounts of commission, for example, then you can see that they have very strong client connections and are probably pretty good at their job. Unfortunately, the better you are at your job, the more enforceable these things are.
In a situation where a former employer does suspect you of breaching your non-compete what are the typical actions and what happens in terms of steps?
It does depend on the seriousness of the breach but nine times out of ten you'll get a letter from the employer and it will enclose restrictions that you are subject to and it'll ask you to effectively cease. It may also ask you to reconfirm the restrictions by way of undertakings. At the same time, a former employer may write to the new employer and advise them about these restrictions and reserve legal right against both the employee and the new employer. The new employer on the basis that it has encouraged or what we call “induced” the breach of the contract.
In a much more urgent or serious case, there is an opportunity for the old employer to go straight to the court. That used to happen a lot more frequently than it does now because there's been much more of a general impetus in litigation to try to avoid, unnecessary Court hearings.
Invariably, it will be an on-notice application which means that the employee and the new employer are made aware of the fact it might be going to court. It would go to court if the employee and new employer refuse to sign undertakings and carry on regardless. If that happens, the former employer issues the claim form or what used to be called the Writ and effectively it's a claim for a breach of contract.
The claim will state the employee has breached these terms, is in breach of contract and the former employer is entitled to my damages. Alongside this claim, you also issue an application to go before the judge in short order. For example, if a claim form is issued on the 16th of September, you might be back in before the judge around about a week later. Everybody pitches up at court and there's an initial decision given as to whether the restrictions are enforceable and whether the employee is in breach. This decision may be to grant an injunction, which is an order of the Court which stops the employee and the employer from doing whatever it is. It's effectively a measure to prevent more damage being caused.
In my experience by the time everyone's set around at court for the day, people start talking and get these things resolved because there's a lot of time involved, a lot of stress, a lot of costs and if possible, it's just better to do some sort of deal. If that's not possible, there will be a full hearing about four months later and the whole thing will be reviewed again, the injunction might remain or be released. The classic situation, going back to the guy I was mentioning earlier who's very good at their job, if they've gone to the new employer and ABC client moves with the employee, the new employer can be forced to account for the profit derived from that client. That effectively is your usual remedy.
What does the future hold for non-competes, is the trend to negotiate outside of court?
A lot of people do look at non-competes and say “why have them in there if they're not enforceable?” The fact is they are enforceable and its always better from an employer perspective to have them in there so they will remain for the future. Also, we were discussing offline remote working, I think a very important factor here is that, if people are working on a more remote basis, it's quite easy for people to forget their commitments. I think it would be very important for employers to review their covenants against that backdrop.
Finally, how much does it costs to instruct a lawyer to review your employment agreement?
The cost starts at around £750 but it will depend on who reviews, the level of seniority of employee, and what is involved. In my team there is myself and then I have two more junior colleagues at differing levels of qualification and the cost will, in part, depend on who is involved but this in turn depends on the complexity of the terms involved.
Jonathan Maude is a Partner at Vedder Price and a member of the Labor and Employment group. He leads the group’s employment team in the firm’s London office.