Enforceability of non-compete clauses for small businesses

Non-compete clauses and small businesses:

This is a question that comes up frequently, and the short answer is that non-compete clauses are potentially enforceable for small businesses, but they face exactly the same legal tests as those used by large employers. In some ways, small businesses may find it harder to enforce them, but in other situations the nature of a small business can actually make enforcement more straightforward. Let me explain the full picture.

The general legal position:

In England and Wales, all restrictive covenants in employment contracts, including non-compete clauses, are prima facie void as restraints of trade. They will only be enforceable if the employer can show that the clause goes no further than is reasonably necessary to protect a legitimate business interest. This applies regardless of the size of the employer. The leading authorities include Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co [1894] AC 535 and more recently cases such as Egon Zehnder Ltd v Tillman [2019] UKSC 32.

What must the employer show:

1. There is a legitimate business interest to protect, such as trade connections with clients, confidential information, or the stability of the workforce.

2. The clause is no wider than reasonably necessary to protect that interest, in terms of duration, geographical scope, and the activities it restricts.

3. The clause is not contrary to the public interest.

The court will assess reasonableness at the date the contract was entered into, not at the date enforcement is sought.

How small business size affects things:

There are several ways in which the small business context is relevant.

On the one hand, a small business may find it easier to show that a particular employee had close personal relationships with clients, access to sensitive commercial information, or knowledge that is genuinely integral to the business. In a five-person firm, a departing employee who knows every client and every pricing structure is arguably a much greater competitive threat than one mid-level employee leaving a firm of five hundred. Courts have recognised this kind of vulnerability.

On the other hand, small businesses sometimes draft clauses that are far too wide. A non-compete clause that prevents someone from working in the same industry anywhere in England for two years, when the business only operates locally and the employee had a modest role, is very likely to be struck down. Small businesses are also more likely to use template contracts or clauses copied from the internet, which may not be tailored to the actual role or business, and that lack of tailoring can be fatal.

There is also a practical dimension. Enforcing a non-compete clause usually means seeking an interim injunction, which is expensive and requires prompt action. A small business needs to weigh the cost of legal proceedings against the likely commercial benefit. Courts will also look at whether the employer has given adequate consideration for the clause, which in most cases is satisfied by the employment itself if the clause was included from the outset, but can be an issue if a non-compete is introduced mid-employment without fresh consideration.

The types of clause and their relative strength:

Non-compete clauses are the most restrictive type of post-termination restraint and are therefore the hardest to enforce. Courts are more willing to uphold narrower restrictions such as non-solicitation clauses (preventing the employee from approaching the employer's clients) or non-dealing clauses (preventing the employee from doing business with those clients even if the client approaches them). A small business may achieve adequate protection through these less aggressive alternatives, which are more likely to survive judicial scrutiny.

Practical considerations for small businesses:

If you are a small business owner wanting to protect your position, the most effective approach is to ensure that any restrictive covenants are properly drafted and specifically tailored to each role. The duration should be as short as reasonably necessary, commonly between three and twelve months depending on the circumstances. The scope should reflect the actual area in which the business operates and the actual clients or work the employee was involved with. It is also wise to combine a non-compete with well-drafted confidentiality provisions and, where appropriate, restrictions on soliciting clients or staff.

If you are an employee of a small business who has been presented with a non-compete clause, you should look carefully at whether the clause is proportionate to your actual role and influence. Many such clauses in small business contracts are poorly drafted and would not survive a legal challenge, but you should not simply assume that is the case.

Proposed reform:

It is worth noting that the previous government consulted on making non-compete clauses unenforceable altogether, or limiting their duration to three months. That proposal has not been enacted. The current position remains that non-compete clauses are enforceable if they pass the reasonableness test, regardless of employer size.

Summary:

Non-compete clauses are not inherently unenforceable just because the employer is small. Nor are they automatically enforceable. Everything turns on whether the clause is a proportionate and reasonable response to a genuine business interest. Small businesses that take the time to draft these clauses properly, with specific reference to the employee's role and the business's actual needs, stand a reasonable chance of enforcement. Poorly drafted or excessively broad clauses will fail, as they do for employers of any size.

If you can share the specific wording of a clause or describe the particular situation you are dealing with, I can give you a much more targeted assessment.