Reforming Non-Compete Clauses

Friday 11 December 2020

On Friday 4 December 2020, the Government issued a consultation paper seeking views on proposed measures to reform the law regulating post-termination non-compete clauses in contracts of employment.

This is not the first time the Government has investigated non-compete clauses. In 2016 the Government published a ‘call for evidence’ to better understand how non-compete clauses operate in practice and why they are utilised.

No further action was taken following the 2016 review, however due to the economic impact the coronavirus pandemic has had this year, the Government is revisiting these clauses as a potential measure to help “unleash innovation, create the conditions for new jobs and increase competition”.

The current law

The law appliable to non-compete clauses is part of English common law and has been, and continues to be, developed by the courts on a case-by-case basis. For these purposes the term ‘non-compete clause’ refers to any clause in a contract of employment that restricts an employee from working for an existing competing business, or from establishing a new competing business, for a defined period after the contract of employment terminates.

Currently, the law provides that all non-compete clauses are presumed to be unenforceable unless they are demonstrated to be reasonable and they will only be considered reasonable and enforceable if an employer can show that:

• the clause protects a legitimate business interest; and
• the clause is no wider than reasonably necessary to protect that legitimate business interest.

The Government is putting forward two alternate potential options for reforming non-compete clauses: 1) mandatory compensation; or 2) a complete ban.

Option 1: mandatory compensation

The Government will consider making post-termination non-compete clauses in contracts of employment enforceable only when the employer provides compensation to the employee for the period during which the clause prohibits the employee from working for a competitor or starting their own business in competition.

Mandatory compensation for non-compete clauses are already required in countries such as France and Germany. In the UK, this is not currently required albeit that some employers do offer compensation for the period of a non-compete clause, and many adopt the practice of placing employees on paid ‘gardening leave’ for the duration of their notice period (which arguably has the same effect as exercising a non-compete clause).

Mandatory compensation would encourage employers to consider carefully whether the use of non-compete clauses is both necessary and reasonable. The Government hopes that, as a financial disincentive, it would ensure non-compete clauses are not inserted into a contract of employment by default. Employers would also be less likely to impose a non-compete clause for an unreasonable length of time as this would incur additional cost.

The Government is also considering implementing “complementary measures” alongside mandatory compensation. These measures would include enhancing transparency and the placing of a statutory limit on the length of a non-compete clause.

Option 2: ban non-compete clauses

An alternative option put forward by the Government is a complete ban on all post-termination non-compete clauses in contracts of employment. The Government believes this would help boost innovation and competition as it has done in California, which boasts some of the world’s most innovative organisations and tech companies and where non-compete clauses are void, regardless of whether they are reasonable.

Concerns

Reforming the law on post-termination restrictions clauses will cause some employers concern as in many cases those clauses are designed to protect legitimate business interests and prevent loss of confidential informational and intellectual property. However, the Government have made it clear that the consultation is seeking views on targeted and very specific reforms to post-termination non-compete clauses in contracts of employment.

The Government will not be considering views on reforming confidentiality clauses or intellectual property clauses which protect against outgoing employees using their employers’ trade secrets or confidential customer lists.

If you have any questions about post termination restrictions or about how these issues may affect your business, please email or call our Employment Law team today on 0113 207 0000.