On 4 December 2020, the UK Government launched a consultation on reforming post-termination non-compete clauses in employment contracts. The consultation seeks views on proposals to require employers to pay employees for the period of the restriction; requiring employers to provide additional transparency by providing in writing the exact terms of the non-compete clause before their employment commence; introducing a statutory limit on the length of non-compete clauses; or, alternatively prohibiting the use of such clauses altogether.
Post termination restrictions or restrictive covenants are often included in employment contracts. Non-compete clauses are one type of restriction, which limits an employee’s ability to work for competitors or set up on a competing business themselves for a specified period after the employment ends. In the UK, such clauses are enforceable to protect an employer’s legitimate business interests and as long as they go no further than is reasonably necessary to protect that interest.
In 2016, the UK Government published a call for evidence on the use and impact of non-compete clauses, seeking views on the advantages and disadvantages of such clauses. It was decided that it was not necessary to take any further action at that stage as it was felt generally that restrictive covenants were a valuable and necessary tool for employers in protecting their business interests and did not unfairly impact on an individual’s ability to find other work.
The new consultation has been issued as the Government considers that there is a requirement to support economic recovery from the impacts of COVID-19 and so the Government is exploring ways in which to increase competition and create new jobs. The consultation is therefore looking at requiring financial compensation to be paid for the period of the restriction or a complete ban on non-compete clauses.
Option 1: Mandatory financial compensation for duration of post-termination restriction.
The consultation seeks views on the option to make post-termination non-compete clauses in employment contracts enforceable only where the employer provides compensation for the duration of the clause. This is the position in Germany, France and Italy. The suggestion is that by requiring mandatory compensation this would:
• encourage employers to consider whether the use of a non-compete clause is necessary and reasonable for the particular role before putting it into an employment contact;
• discourage the use of such clauses as being standard in an employment contract;
• discourage employers from applying non-compete clauses for longer than necessary as this would incur additional cost for the employer;
• reduce litigation as ex-employees will feel less inclined to breach potentially enforceable restrictions because they have been financially compensated; and
• avoid employees feeling they have to comply with restrictions which are drafted too widely and unlikely to be enforceable because they fear the legal repercussions of not doing so.
This option would also be complemented by additional measures:
• Introducing a requirement for employers to disclose the exact terms of the non-compete agreement to an employee in writing before they enter into the employment relationship. Failing to do so would make the clause unenforceable.
• Introducing statutory restrictions on the maximum length of post-termination non-compete clauses. The Government considers that this would have the advantage of certainty and prevent employers from using clauses with an unreasonable length. It acknowledges that there is the risk that employers may consider the maximum allowed period as a standard to be used in all cases, but the requirement to pay compensation for the duration of the period of a clause could act as a disincentive to employers to impose clauses with a longer than necessary duration. The consultation asks what would be the maximum limit on the period of the non-compete clauses and whether that should be 3, 6 or 12 months or another period?
The consultation therefore seeks views on what a reasonable level of compensation would be for the period of the non-compete clause as a percentage of the ex-employee’s earnings, ranging from 60% to 100% or any other proposal. It also seeks views on whether an employer should have the flexibility to unilaterally waive a non-compete clause or whether this should be by agreement between the employer and the employee. Responses are also sought on how this would affect the employer’s obligation to continue to pay compensation.
Option 2: Ban on Non-compete clauses
The consultation’s alternative proposal is to prohibit the use of post-termination non-compete clauses in contracts of employment altogether. The Government considers that this could provide greater certainty for all parties, but that the scope of the ban would need to be clearly defined and consideration would need to be given to whether any exemptions should be made. Such a ban could also have a positive effect on innovation and competition by making it easier for individuals to start new businesses, enabling the diffusion of skills and ideas between companies and regions, and increasing labour mobility.
The Government acknowledges that there are arguments against prohibiting the use of non-compete clauses, as they can help protect legitimate business interests and prevent harm to a business through, for example, loss of confidential information. However, the employer’s legitimate interests can be protected by intellectual property rights.
Other consultation questions
Although the consultation primarily focuses on restriction of the use of non-compete clauses, it also asks for views on whether measures should be introduced to restrict the use of other post-termination restrictive covenants, such as non-solicitation, non-dealing, non-poaching and goodwill protection clauses. It also asks employers whether the restrictions should be extended to workers under s230(3)(b) Employment Rights Act 1996.
The consultation closes on 26 February 2021. If the Government determines that it will follow one of these options this will be a significant change for employers. Currently the proposals are limited to non-compete clauses in employment contracts but the consultation asks whether this should be applied to other types of restriction including non-solicitation, non-dealing and non-poaching and whether this should be extended to other workplace contracts.