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Restrictions on rights of employees who want to fly the nest.

Byline: BETHAN DARWIN LAW & MORE

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

The call for evidence, due to be launched shortly, will look for views on whether this type of restrictive practice is acting as a barrier to innovation and employment and preventing start-ups from prospering.

I have written about restrictive covenants (or post-termination restrictions as they are also known) in this column before.

In that column I said employers needed to identify what level of protection they considered necessary to protect their business interests and draft their contracts carefully to ensure their restrictions were enforceable.

I suggested to employees that they read their contracts before signing a contract of employment and to bear the restrictions in mind when considering a move.

But what does the business world think of a world where restrictive covenants are banned? Over the past few weeks, in a random and not at all scientific survey, I've been asking that question of clients and contacts and, in particular, whether they think restrictive covenants stifle innovation and entrepreneurship.

The responses have been fairly consistent. They boil down to this - I didn't think they were fair when I was an employee, but now that I'm an employer I think they are necessary to protect my business. I'm the one taking the financial risks of starting up or building a business and I would not be so willing to take that risk if my employees could leave and immediately set up a competing business and take my staff and my customers with them.

And I would not share with my employees my business knowledge and contacts so readily if I thought that once they'd learned everything they needed from me, they could swan out the door with it all at the drop of a hat.

So restrictive covenants encouraged these business owners into entrepreneurship.

However, more than one of those business people went on to add that restrictive covenants were needed because they made people unwilling to leave and set up business on their own.

The enforced period of non-competition or of not being able to do work for their former employer's customers and the resulting loss of income for a period stopped employees from leaving at all.

These comments support Mr Javid's view that restrictive covenants act as a barrier to entrepreneurship. Some employees are put off from ever taking the leap to set up on their own because of their post termination restrictions.

The interests of employers and employees often compete and the question is how to balance those competing interests. My view is that the present law on restrictive covenants does a fairly good job at achieving that balance for the following reasons: | Employers who have overlong or one-size-fits-all restrictions will be advised that those restrictions are probably unenforceable; | Employees who don't make the leap into entrepreneurship because they can't poach their former employer's customers and staff for a while probably don't have the stomach for the other challenges and uncertainties of start-up life anyway; | Employees who really want to become entrepreneurs will take advice. If they are advised the covenants are unenforceable they may argue the toss with their employers and see who blinks first. If they are advised the covenants are enforceable, they will just wait until their restrictions have expired before launching.

The real trick for all businesses is to make sure their customers and their employees feel valued and cared for such that they can't be enticed away to the competition anyway.

Bethan Darwin is a partner with law firm Thompson Darwin

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<BBusiness Secretary Sajid Javid is considering changes to the restrictions on employees who start up a business in competition with a former employer Carl Court
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Title Annotation:Business
Publication:Western Mail (Cardiff, Wales)
Date:May 11, 2016
Words:643
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