Non-Compete Clauses Consultation on measures to reform post termination non-compete clauses in contracts of employment

8th December 2020 Employment

On 4 December 2020 the UK Government released a consultation paper on measures to reform post-termination restrictive covenants. The consultation follows as part of the Government’s continued response to the impact of the global COVID-19 pandemic on the UK economy. 

Background

In 2016, under David Cameron’s Government, the BEIS published the outcome of a similar consultation into non-compete clauses. Responses fed back 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 they took no further action at that time. Since the review, the global COVID-19 pandemic has had a profound impact on the labour market and it has forced Boris Johnsons’ Government to “unleash innovation” and create the conditions for new jobs and to re-consider the reform of post-termination restrictions.

Proposal 1: Mandatory compensation

Making post-termination, non-compete clauses in contracts of employment enforceable only when the employer provides compensation for the duration of the restriction. Such an approach is common in other jurisdictions such as France, Italy and Germany. 

The Government recognises that the introduction of mandatory compensation may lead to a reduction in litigation, as employees may be less likely to breach clauses if they are being compensated. Furthermore, the Government recognises that introducing mandatory compensation for non-compete clauses could give rise to greater use of ‘gardening leave’ and other indirect restraints, such as forfeiture provisions being used, which result in employees losing deferred stock or cash incentives in the event that they join a competitor.

As an addition to mandatory compensation, the Government states that it is also considering complementary measures. The first would be to enhance transparency where non-compete clauses are used, and to place statutory limits on the length of non-compete clauses. Currently in the UK, the length of a non-compete clause should be reasonable and no longer than necessary. Introducing a specified maximum period would have the advantage of certainty and would prevent businesses using non-compete clauses that are unreasonable in length. However, the requirement to provide compensation for the period could also act as a disincentive for employers to apply non-compete clauses for long periods, as it would carry additional cost.

The second would be requiring an employer to disclose the exact terms of the non-compete agreement to the employee in writing before they enter into the employment relationship. Failing to do so would make the clause unenforceable. This would ensure that the prospective employee is aware of the exact terms of the noncompeting when entering into an employment relationship. It would enable them to understand how such a clause would restrict their ability to start a new business or find new work after they leave allowing them to make an informed decision.

Proposal 2: Ban non-compete clauses

In the alternative, the Government considerers whether all post-termination non-compete clauses should be made unenforceable and points to the examples of the existing position in jurisdictions such as California and Israel. The paper states that a ban on post-termination, non-compete clauses in contracts of employment could have a positive effect on innovation and competition making it easier for individuals to start new businesses and enabling the diffusion of skills and ideas between companies and regions, which can in turn impact economic growth.

What does this mean for employers?

Although the focus of the consultation is on non-compete clauses, there is scope to deduce that any reform may very well extend to other forms of post termination restrictions in the future. On this basis, employers should be mindful of any significant changes to the law following the review of the consultation in February 2021. 

If you need advice or have any queries about dealing with post-termination clauses or any workplace issues, please contact Paul Chamberlain or another member of the employment team at JMW Solicitors LLP on 0345 241 5305.

This note is for general guidance only and should not be used for any other purpose. It does not constitute, and should not be relied upon as legal advice.

JMW Solicitors is a Limited Liability Partnership. The copyright in this note is owned by JMW. Any reproduction of this article should be credited to JMW. All rights reserved.

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Lauren Scott is a Trainee Solicitor located in Manchesterin our Trainee Solicitors department

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Paul Chamberlain is a Partner and Head of Department located in Manchesterin our Employment department

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