Government reforms (1): Non-compete clauses – consultation

What do we already know?

Some time ago (2016!) the Government introduced a ‘call for evidence on restrictive covenants, particularly non-compete clauses(Government reforms (1): Restrictive covenants – call for evidence).  They wanted to seek “views from individuals and employers on whether this type of restrictive practice is acting as a barrier to innovation and employment and preventing British start-ups from prospering”.

Non-compete clauses are a type of restrictive covenant which prevents individuals from competing against their former employer or working for a competitor for a set period of time.

As a result of the call for evidence, the Government concluded that restrictive covenants were “a valuable and necessary tool for employers to use to protect their business interests and do not unfairly impact on an individual’s ability to find other work“ and took no further action at that time.

What’s new?

On 4 December 2020, the Government announced a consultation on proposals to reform the enforceability of non-compete clauses in employment contracts (available here).

While the consultation focuses on the use of non-compete clauses, it also asks if the restrictions it proposes should be extended to other forms of restriction such as non-solicitation and non-dealing covenants commonly found in UK contracts as well.

If these proposals are taken forward, they would fundamentally alter the way in which businesses can protect their confidential information, customer connections and skilled workforces when staff members move to competitors.

The consultation closes on 26 February 2021.

Reasons for the consultation

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.  The Government states that it is looking to “unleash innovation“ and mirror innovation hub jurisdictions such as California and Israel, which do not enforce non-competition obligations.

What are the proposals?

The consultation document outlines two proposals:

1. Mandatory compensation: Non-compete clauses would only be enforceable where the employer provides the departing employee with compensation for the period of restriction. This could equate to a proportion of their remuneration before termination, or possibly a legislatively set amount. This approach is already common in France, Italy and Germany.

As well as mandatory compensation, the Government is considering complementary measures that would:

• enhance transparency by requiring an employer to disclose the terms of any non-compete clauses to an employee in writing before they commence work for an employer (rather than, as sometimes can occur, employers providing employment contracts after employment has commenced); and
• place a statutory limit on the length of non-compete clauses in contracts of

2. Ban non-compete clauses: Legislation would be passed to render all post-termination non-compete clauses unenforceable, along with other options that fall short of this. It is argued that this could provide enhanced certainty for all parties. The Government acknowledges that there are many arguments in opposition to this proposal, but considers the examples of this approach in California and Israel to be persuasive.

 

Implications:  This could be the start of a significant change to the current law on enforceability of post-termination restrictions.  While any decisions on this are still likely to be a long way off, it maybe helpful for employers to start to consider how they can protect their business with more limited, or no, post-termination restrictions.  Employers will need to consider how to prevent staff from using valuable confidential information or customer relationships, or poaching skilled staff when they join new employer.  For example, employers may start by an audit of their other contractual protections and operational practices to check that they go as far as they can to protect confidential information, and trade secrets, in particular.

However, the consultation indicates that its focus is on employment contracts, rather than LLP agreements, franchise agreements, consultancy agreements and share options arrangements.  It remains to be seen what remit any new legislation would have, and whether this might encourage businesses to deploy these types of restrictions in other formats that are not so closely connected with the employment relationship.