INSIGHT: Are employment rules stifling British innovation?

Posted on May 12, 2016

Are employment rules (like non-compete clauses) stifling British innovation?

The government has pledged to make Britain the best place in Europe to innovate and start up a new business. To help with fulfilling that pledge, the government aims to publish an Innovation Plan later this year. This plan will set out how to make the UK “a better place to turn ideas into new products and technologies”.

National innovation Plan: a call for ideas (a government consultation)

As part of the preparation of the Innovation Plan, the Department for Business, Innovation and Skills (DBIS) has launched a consultation: the Government’s National innovation Plan: a call for ideas.

Businesses are also being asked to comment on a variety of issues including, for example, what difficulties they encounter in seeking finance for innovation, how the government can improve the UK’s infrastructure and how to make regulations work better for business. (You can read about the other issues here.)

The employment law perspective

From an employment law perspective, what caught our eye was the government’s request that businesses give feedback on “non-compete” clauses. The government is concerned that such clauses may be “… stifling [businesses’] opportunities to innovate and grow”.

What are “non-compete” clauses?

“Non-compete” clauses – sometimes called “restrictive covenants” or “post-termination restrictive covenants" (PTRCs) - are a common feature of employment contracts. They are “clauses that prevent an individual from competing against their former employer”.

Under such a clause, the employee agrees not to take certain action if he or she should leave the business. For example the employee may be forbidden from taking client or business information with them or using it after they leave. This contractual promise lasts for a specified period of time after the employment ends: the length of time will depend on the nature of the role.

It is important to bear in mind that PTRCs are only legally enforceable if they are needed to protect a legitimate business interest. In the social media era, this area of law is becoming more complex. For example, the widespread use of LinkedIn has introduced some interesting arguments in the context of restrictive covenants. For example, there have been cases where the court has had to consider who owns the contacts on the employee’s LinkedIn account.

So do PTRCs stifle British innovation?

The answer probably depends on whether you are an employer or an aspiring entrepreneur leaving a job to branch out on your own.

Employers believe PTRCs prevent employees from “taking” their employer’s legitimate business interests and leaving to set up in competition, often with other team members. Employers see PTRCs as a means to protect their business interests including their contacts and clients.

Employees, meanwhile, argue they personally are the ones who have developed the relationship with the business contacts - not the employer. They believe the client’s trust and confidence lies with the employee and that the client would leave the employer if the employee left.

Whatever your position, there is no doubt that PTRCs are intended to be a restriction on trade and can effectively prevent an employee from leaving and setting up a new business. To that extent therefore, there is a good argument that PTRCs can stifle innovation and put employees off starting up their own businesses.

Have your say!

If you are interested in responding to the Government Consultation, click here. You have until 30 May 2016…

Plan ahead – get proper employment contracts in place

It is far more cost effective to ensure your employment contracts are up to date and tailored to your business than to try to restrict a former employee from using your business information after they leave.

We regularly draft and advise our clients on employment contracts and non-compete/PTRC clauses. To find out more on how PTRCs work and when they can be used, click here.

To discuss employment contracts or issues arising with non-compete clauses, please contact Susan Mayall on 0161 684 6948 or email enquiries@pearsonlegal.co.uk.

Also in this issue of Insight

Please note that the information and opinions contained in this article are not intended to be comprehensive, nor to provide legal advice. No responsibility for its accuracy or correctness is assumed by Pearson Solicitors and Financial Advisers Ltd or any of its members or employees. Professional legal advice should be obtained before taking, or refraining from taking, any action as a result of this article.

This blog was posted some time ago and its contents may now be out of date. For the latest legal position relating to these issues, get in touch with the author - or make an enquiry now.