Wed 09 Dec 2020

UK Government consultation to consider banning post-termination non-compete restrictions

Government consultation will also look at other possible reforms.

A common misconception is that restrictive covenants are not worth the paper they are written on. That is certainly not the case and restrictive covenants, including non-compete restrictions, are regularly upheld by the Courts. That could all be set to change though with the UK Government launching a consultation on measures to reform post-termination non-compete clauses in contracts of employment.  According to the UK Government the consultation, which is due to close in February 2021, has been triggered by the Covid-19 pandemic and the need to look at measures to "unleash innovation, create the conditions for new jobs and increase competition".

There are two reforms, in particular, that the UK Government is interested in views upon.  The first is "mandatory compensation".  This means post-termination non-compete clauses in contracts of employment would only be enforceable if the employer provided compensation during the restriction period.  It is thought this would:-

  • encourage employers to consider whether the use of a non-compete clause is necessary and reasonable for that particular role before inserting it into a contract;
  • create a financial disincentive to the use of non-compete clauses ‘as standard’ in contracts of employment and reduce misuse of non-compete clauses; and
  • disincentivise employers from applying a non-compete clause for an unreasonable length of time as this would incur additional cost.

The UK Government are also interested in views on the possibility of complementing this with measures to enhance transparency such as introducing a requirement for employers to disclose the exact terms of a non-compete agreement to the employee in writing before they enter into the employment relationship.  A failure to do so would render the clause unenforceable.  Views are also sought on the potential to place statutory limits on the length of non-compete clauses.

The second and more extreme proposal is to make post-termination, non-compete clauses in contracts of employment unenforceable - effectively banning them.  It is suggested in the consultation document that this would have the benefit of providing greater certainty for all parties and could have a positive effect on innovation and competition by making it easier for individuals to start new businesses and enabling the diffusion of skills and ideas between companies and regions.  However, views on options short of a ban which instead limit enforceability in the interests of spreading innovation are also sought.

The possibility of a complete ban may well cause concern amongst companies who use them to protect their legitimate business interests and prevent harm to their business through, for example, loss of confidential information.  The consultation document does though highlight that it is only reforms in relation to the use of post-termination non-compete clauses that the consultation is looking for views, not confidentiality clauses, intellectual property law or other means of protecting legitimate business interests. 

If responses to this consultation are similar to those received following a 2016 Call for Evidence to better understand how non-compete clauses are used and why, and to look at their prevalence and the benefits and disadvantages associated with them, then an outright ban seems unlikely.  At that time, the majority of responses were in favour of restrictive covenants as a valuable and necessary way of protecting business interests and the UK Government decided it was unnecessary to take any further action.  However, a lot of water has passed under the bridge since then and the damage inflicted on the labour market by Covid-19 may encourage some reform in this area.

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