UK Government considers reforms that could affect non-compete clauses in employment contracts

At the end of 2020, the UK Government launched a consultation aimed at reforming non-compete clauses that place restrictions on ex-employees after the termination of their employment contracts.

The consultation (which is due to close in February 2021) is driven by the need to “unleash innovation, create the conditions for new jobs and increase competition,” particularly due to the impact of the Covid-19 pandemic on the UK’s labour market, according to the consultation paper.

The government is concerned that non-compete clauses are effectively a barrier to competition, job creation and innovation because they prevent individuals from working for competing businesses or starting new businesses for a period of time.

Currently, in the UK, employees are not usually paid during the period of a non-compete covenant. In Germany, France and Italy, payment is a requirement.  The consultation seeks views on proposals to require employers to continue paying compensation to employees for the duration of a post-termination non-compete clause.

This could be complemented by a requirement for employers to confirm to employees in writing, the exact terms of a non-compete clause before their employment starts. There could also be a limit imposed by law, on the length of time that non-compete clauses are enforceable, or a ban on the use of post-termination non-compete clauses altogether.

What are non-compete clauses?

Non-compete clauses are used in some employment contracts to restrict an employee’s ability to start up or work for a competing business for a certain period of time after they leave. They are a type of post-termination restriction or “restrictive covenant”.

Up until now, the law relating to non-compete clauses has been developed by the courts on a case-by-case basis. The courts recognise the tension between a person’s freedom to trade and the need to uphold contracts and protect employers’ legitimate business interests.

The law assumes that non-compete clauses, and other types of post-termination restrictions, are unenforceable unless they are drafted no wider than is reasonably necessary to protect a legitimate business interest of the ex-employer.

Why is the Government seeking to make these reforms?

The government is considering making post-termination non-compete clauses in employment contracts only enforceable if the employer provides compensation during the restriction period and is asking for views on this. Government reasoning is that these reforms may:

·        encourage employers to consider whether the use of a non-compete clause is necessary and reasonable for a particular role before putting it into an employment contract;

·        create a financial disincentive for employers to use non-compete clauses ‘as standard’ in employment contracts and reduce misuse of them;

·        discourage employers from applying non-compete clauses for an unreasonable length of time as this would incur additional costs for the employer;

·        reduce litigation as employees may be less likely to breach a non-compete obligation where they are being compensated financially;

·        prevent employees from feeling that they must abide by restrictions that are too wide to be reasonable.

How much should ex-employees be paid for adhering to non-compete clauses?

The government is also asking for views on what level of compensation employers should have to pay if it goes ahead with this proposal. It suggests that this should be a level of compensation that is set as a percentage of the ex-employees average weekly earnings prior to termination, for the duration of the non-compete clause.  This could be 60%, 80%, 100% or some other percentage.

Should financial compensation for ex-employees also apply to other post-termination restrictions?

It is also asking whether the requirement to pay compensation during the period when the employee is restricted should be limited to non-compete clauses or should also apply to other types of post-termination restrictions, such as non-solicitation and non-dealing clauses.

The government is also considering combining requiring employers to pay compensation during post-termination non-compete clauses with two “complementary” measures. These are:

  • Introducing a requirement on employers to disclose the exact terms of non-compete agreements to employees in writing before they enter into employment relationships. Failing to do so would make such clauses unenforceable.
  • Putting statutory limits on the length of non-compete clauses, so that they would only be enforceable if they did not exceed a maximum period.

The consultation paper says that courts tend to enforce non-compete restrictions of up to 12 months, depending on the seniority of the employee concerned and their access to confidential information and clients. The government is also asking for views on whether clauses should be limited to 3, 6, 12 or some other number of months.

Should non-compete clauses be banned altogether in the UK?

The second proposal is to make post-termination non-compete clauses in employment contracts unenforceable – so effectively banning their use of them altogether.

It is suggested in the consultation paper that this would have the benefit of providing greater certainty for all parties and would make it easier for individuals to start new businesses, find new work and use their skills to drive economic recovery.  However, it also makes clear that the government recognises that non-compete clauses play an important role in helping businesses to protect their legitimate business interests.

The consultation document does say that the government is not currently looking at reforms to confidentiality clauses, intellectual property law or other means of protecting legitimate business interests.

If you have any questions or need any legal advice pertaining to non-compete clauses, our solicitors will be happy to assist. 

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