Title: United Kingdom: Consultation launched on reform of non-compete clauses in employment contracts

Key takeaways

The consultation document explains that the government is considering changes in this area in order to boost innovation, create conditions for new jobs, and to increase competition in order to support economic recovery from the effects of COVID-19. It follows a previous call for evidence, which concluded in 2016 that the majority view was that restrictive covenants were a valuable and necessary tool for employers, and did not unfairly impact upon an individual’s ability to find other work.

The proposals on which the government has requested views include:

• requiring the employer to pay the employee during the term of the restrictive covenant
• requiring the employer to give additional information on the effect of the relevant clause(s) at the time the contract is signed
• placing statutory limits on the duration of the restrictions
• alternatively, making post-termination non-compete clauses in contracts of employment unenforceable.

Such clauses are commonplace across many industries and sectors. While commonly found in senior employees’ contracts, junior staff with strong client relationships may also have these restrictions in their contracts. The consultation is therefore of interest to all employers who use such clauses, or who hire staff in industries where they are typically used.

In more detail

Background to the consultation

Post-termination restrictions are governed in the UK by common law developed by the courts on a case by case basis.  All such clauses and other restraints of trade are only reasonable and enforceable if they are demonstrated to protect a legitimate business interest of the employee’s former employer, and the clause is no wider than reasonably necessary to protect that legitimate business interest.

The Department for Business, Energy and Industrial Strategy consultation document explains that although the government did not take forward any actions in 2016 at the time of its call for evidence to understand how non-compete clauses are used, COVID-19 has had a profund impact on the labour market.  In order to encourage innovation, create the conditions for new jobs and increase competition, it believes the time is right to seek views on options to reform post-termination restrictions.

What are the post-termination restrictions to which the consultation applies?

While the consultation document refers to non-compete post-termination restrictions in its title and throughout, it also seeks views on whether the proposals referred to below should apply to non-solicitation clauses (to prevent an employee from poaching employees or customers from their former employer for a period of time), non-dealing clauses (to prevent employee from doing business with the same), and goodwill protection clauses to prevent the seller of a business going immediately into competition with the purchaser.

The consultation deals only with clauses in contracts of employment and not, for example, to agreements with self-employed contractors. It does not seek views on clauses dealing with confidentiality, intellectual property, or other means to protect legitimate business interests.

Option 1: Mandatory compensation

The government is particularly interested, it says, on views on an option to make post-termination non-compete clauses enforceable only when the employer pays the former employee compensation for the duration of the restriction. Similar rules already apply in jurisdictions such as Germany, France and Italy. Suggested levels of compensation vary from 60 to 100% of normal remuneration.

It believes this would discourage widespread use of non-compete clauses as standard by employers, limit the length of a restriction since it would increase the cost, and ensure that individuals are compensated fairly if they are unable to join or start a business in their field of expertise for a period. In addition, it suggests that there might be a reduction in litigation if ex-employees are less likely to breach clauses if they are being compensated.

The government expects that this option would give rise to greater use of garden leave clauses and indirect restraints, such as the forfeiture of deferred stock or cash incentives in the event they join a competitor.

Complementary measures

The consultation also asks whether this should be complemented with additional measures to enhance transparency and communication, or whether limits should be placed on the post-termination duration of such clauses.

This could introduce a requirement for employers to disclose the exact terms of the non-compete agreement in writing before they enter into the employment relationship, so that the employee understands how the restriction will affect their ability to start a new business or join a new employer in the future.

At present, a non-compete clause in the UK is not limited in duration by anything other than the requirement that it be reasonable and no longer than necessary on the facts of that case. A maximum would provide certainty to businesses and individuals, but there is a risk that employers might read it as a standard in all cases. The consultation suggests limits of three to 12 months, and asks for views.

Option 2: A ban on non-compete clauses

As an alternative, it points to the examples of the existing position in jurisdictions such as California and Israel, and canvasses views on whether such clauses should be made unenforceable – in effect, a complete ban on the use of post-termination non-compete clauses in employment contracts. This would provide certainty for all parties, and the document states that this would have a positive effect on innovation and competition by making it easier for new start-up businesses to be formed.

• Measures to reform post-termination non-compete clauses in contracts of employment open consultation: https://www.gov.uk/government/consultations/measures-to-reform-post-termination-non-compete-clauses-in-contracts-of-employment