Non-compete clauses

Background

The Government has begun a consultation on measures to reform post-termination con-compete clauses in employment contracts as part of its effort to explore ways in which to ‘create the conditions for new jobs and increase competition’.

A non-compete, or non-competition clause is one of a number of different types of restrictions found in employment contracts that are collectively known as “restrictive covenants”. Other examples of restrictive covenants include non-solicitation and non-poaching clauses.

Non-compete clauses place restrictions on employees from joining a rival employer, or from setting up a rival business, for a defined period after termination. There is no statutory framework that governs non-compete clauses these, along with other restrictive covenant clauses, have instead been developed over the years by the courts.

When assessing restrictive covenants, the courts determine that they are void, as they constitute a restraint of trade and contrary to public policy, unless the employer is able to show that it has a legitimate proprietary interest that it is appropriate to protect and the protection sought is no more than reasonable having regard to the interests of the parties and the public interest. In short, the starting point is that restrictive covenants, including non-compete clauses, are unenforceable and the onus is on the employer to prove otherwise.

Mandatory compensation

One option under consideration is to make non-compete clauses enforceable only when the employer provides compensation for the duration of the defined period in which the individual is prohibited from joining a rival employer or setting up a rival business. According to the Government, the implementation of mandatory compensation would encourage employers to decide whether the inclusion of a non-compete clause is necessary and reasonable for a particular role, before inserting it into the contract, thereby creating a ‘financial disincentive’ to the use of them as a standard clause as well as applying them for an unreasonable length of time.

The Government also considers that such a measure could lead to less litigation, as ex-employees will be more inclined to comply with a non-compete clause if they are being compensated for its duration.

This revised approach would also allow the Government the opportunity to introduce various complementary measures that serve to increase the transparency of non-compete clauses and tighten control over their length. One suggestion is to require employers to disclose the exact terms of the non-compete agreement to the employee in writing before entering into the employment relationship.

Banning non-compete clauses

In the alternative, the Government is considering a complete ban on all non-compete clauses, in the interests of increasing innovation and competition, citing examples such as California and Israel where such clauses are void. However, it does recognise the arguments for non-compete clauses, namely that they can help to protect legitimate business interests, and therefore seeks views not only on a ban, but also on options short of an out-right ban that serve to limit their enforceability and promote innovation.

If either of these approaches is ultimately taken, this would be quite a step change for both employers and employees.  We will of course keep you updated on any changes. The consultation is due to end on 26 February 2021. A link to the consultation paper can be found here.