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The beginning of the end for non-compete clauses?

Government have commenced a consultation process on reform of post-termination non-compete clauses in employment contracts

Andrew Collier
Andrew Collier HR Adviser
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BEIS have opened a consultation process to consider landmark reform to the law on post-termination non-compete clauses in employment contracts. 

The consultation states that the government is exploring the option of restricting the use of non-compete clauses in order to maximise opportunities for individuals to start new businesses and find new work. The consultation seeks views on several options.

Mandatory financial compensation for duration of post-termination restriction

One option being proposed is to make post-termination non-compete clauses in employment contracts only enforceable where the employer provides compensation for the duration of the clause. This is the position in Germany, France and Italy. The government considers that this would:

  • Discourage widespread use of non-compete clauses by employers, encouraging them to limit their use to only where it is necessary and reasonable for a particular role.
  • Give individuals the freedom and flexibility to use their skills to drive the UK's economic recovery. 
  • Ensure individuals receive a fair settlement if they are restricted from joining or starting a business within their field of expertise. 
  • Reduce litigation as ex-employees will feel less inclined to breach potentially enforceable restrictions because they have been financially compensated.

The consultation seeks views on the appropriate level of compensation. It is considering whether the level of compensation should be set as a percentage of the ex-employee's average weekly earnings prior to the termination of their employment and asks for views on whether this should be 60%, 80%, 100% or some other percentage amount. 

The consultation also seeks views on whether employers should have the option of waiving the non-compete clause early, releasing the employee from the restraints of the clause and the employer from the obligation to pay compensation.

Enhancing transparency and communication where non-compete clauses are used

As a complimentary measure to mandatory compensation for the duration of a post-termination non-compete clause, the government is proposing to introduce a requirement for employers to disclose the exact terms of the non-compete agreement to an employee in writing before they enter into the employment relationship. Failing to do so would make the clause unenforceable. 

The obvious issue with this proposal is the fact that non-compete clauses are often introduced during an employee's employment for legitimate reasons when they move to a more senior role. 

Statutory limits on the length of non-compete clauses

Another complimentary measure to mandatory compensation proposed is to introduce statutory restrictions on the maximum length of post-termination non-compete clauses. The government considers that this would have the advantage of certainty and prevent employers from using clauses with an unreasonable length. 
It acknowledges that there is the risk that employers may consider the maximum allowed period as a standard to be used in all cases, resulting in a longer restriction than might otherwise have been regarded as reasonable and enforceable by the courts under the current regime. However, the requirement to pay compensation for the duration of the period of a clause would act as a disincentive to employers to impose clauses with a longer than necessary duration. 

The consultation seeks views on whether the duration of a clause should be limited to three months, six months, 12 months, or some other period post-termination. 

Making post-termination non-compete clauses unenforceable

The consultation's alternative proposal is to prohibit the use of post-termination non-compete clauses in contracts of employment altogether. The government queries whether this would have a positive effect on innovation and competition by making it easier for individuals to start new businesses, enabling the diffusion of skills and ideas between companies and regions, and increasing labour mobility.
 
The consultation period closes on 26 February 2021 and in a period where many businesses have enough on their plate  (with Covid and Brexit responses to grapple with) one wonders how extensive the engagement will be in what is, clearly, a very important and controversial field in employee relations.  Watch this space!


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