Non-Compete Clauses Stalling Innovation and Business Start Ups

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Katie William

Innovation and entrepreneurship is being stifled by employment covenants which prevent professionals and skilled workers taking up new jobs, according to legal expert Katie Williams.

The employment specialist and partner at legal firm Pinsent Masons in Aberdeen believes overly restrictive contracts could also drive key workers out of the oil and gas industry and create a brain drain.

The UK Government is acting on concerns about the potential misuse of so-called restrictive covenants by calling for evidence on whether such practices act as a barrier to employment.

Katie Williams said: “It’s very common, especially in the energy sector, that employees will have a covenant in their employment contract which prevents them from joining a potential competitor for anything up to 12 months after leaving a job.

“Most employees rightly respect those conditions when they leave, but in many cases it could be argued such covenants were included at the outset of the employment as a ‘knee-jerk’ condition, and when closely examined have little merit.

“The net effect is that highly skilled workers could be forced out of the oil and gas industry and in to another sector where it is easier to find a suitable job. It is prejudicial to moving talent around and in the case of entrepreneurial individuals, it could deter them from starting-up a new business and stifle innovation, which is not something the oil and gas industry can afford at the current time.”

Amid concerns about this widespread practice, the Department of Business, Innovation and Skills has issued a ‘call for evidence’ on post-termination restrictions.

Business Secretary Sajid Javid has asked businesses and entrepreneurs to give their views on whether clauses that prevent an individual from competing against their former employer are stifling opportunities to innovate and grow.

He said: “The clauses are only enforceable in a court of law if it protects a legitimate interest and is reasonable. However, there have been suggestions that they can hinder start-ups from hiring the best and brightest talent, so the government is asking for views from individuals and employers on whether this type of practice is acting as a barrier to innovation and employment.”

The non-compete clause is also causing problems for individuals who have been made redundant as a result of the oil and gas industry downturn.

Williams added: “I’ve had cases where people who have been made redundant who are under a restrictive covenant, and have been prevented from taking on a similar job for 12 months. This is clearly unfair as they find themselves in this position through no fault of their own and have a huge amount to offer a new employer, but they can’t do so because they fear it will be in breach of their employment contract.

“Some employers will confirm in writing that they won’t enforce covenants in these circumstances, but there are others who won’t and this hinders the movement of valued and talented workers.”

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