Employers should start thinking of ways to protect their business after the government has proposed changing the way firms can restrict their departing employees, says Suliat Jimoh, paralegal at Winckworth Sherwood.
Both the UK and US governments have proposed to reform restrictive covenants in employment contracts post-termination with a view to empower employees by allowing them to change jobs more freely.
It is expected the changes will increase competition among businesses and boost the economy. But it is not yet clear whether they will affect employees only, or also partners and LLP members.
In a Q&A with FTAdviser In Focus, Jimoh explains what the proposed changes might mean for financial services.
FTA: What are non-compete clauses and how do the rules currently in place affect financial services in the UK?
SJ: Non-compete clauses are obligations which, at their simplest, may be used to prevent a departing employee from going to work for a competitor.
They are very common in the financial services industry and particularly so at the highest levels, where a senior leaver may be expected not to work with a competitor for up to around 12 months.
The main argument in support of these kinds of restrictions is that, during their employment, individuals will have confidential information regarding their employer’s business that they could potentially use to their advantage following the termination of their employment.
While there are other, more direct ways of protecting that information, often a straightforward prohibition on working for a competitor is simplest to police.
There are controls on non-compete obligations and, in short, they can go no further than reasonably necessary to protect a business’s legitimate interests. Otherwise, they will be unenforceable.
In reality, however, provided that a non-compete is drafted carefully, the current law often permits non-competes and so limits individuals’ ability to move between roles.
FTA: The government plans to change non-compete rules for employees, what impact will that have on firms?
SJ: The headline change announced by the government is that non-compete clauses will be limited to just three months in duration.
That may have a liberating effect, with employees finding a move easier and less long-winded, and employers therefore having a more readily available pool of talent.
On the other hand, employers may move to compensate for the change by requiring lengthier notice periods, provided that they are willing to meet the additional costs of paying salary for a longer time.
FTA: Will these rules cover a broader spectrum of employee status, such as partners, LLPs etc?
SJ: The interests being protected by non-compete obligations are often similar, whether one is discussing an employee, a partner or an LLP member.
In addition, many partnerships and LLPs are increasingly corporate in feel and so there may be good reasons to have uniformity.
At present, it is unclear how wide the changes will be in scope.
