287: Government consultation announced on reform to post-termination non-compete clauses
The government has issued a consultation on the use of post-termination non-compete clauses in employment contracts. Typically, these clauses prevent employees from setting up a competing business or moving to a competitor for a period ranging from three to twelve months after termination of their employment. The consultation follows on from a Call for Evidence in 2016 on how and why employers in the UK use non-compete clauses and the benefits and disadvantages associated with them. Although no actions were taken at that time, the effect of the pandemic on the labour market has prompted the government to look at measures to encourage innovation and increase competition.
The government believes that non-compete clauses may potentially hamper innovation and competition, particularly in the current depressed economic climate. Although other types of restrictive covenant could also be said to have the same effect, include non-dealing and non-solicitation covenants, the consultation only focusses on non-compete clauses.
There are two main options set out in the consultation:
Option 1: Mandatory compensation
Under the first option post-termination non-compete clauses in employment contracts would only be enforceable where the employer provides compensation to the employee for the period covered by the clause. The consultation asks for views on whether this should be 60%, 80% or 100% of average weekly earnings. The consequences of this option are as follows:
- this would encourage employers to consider whether the use of a non-compete clause is necessary and reasonable for a particular role before putting it in a contract, rather than including one as standard practice;
- employers would be disincentivised from applying a non-compete clause for an unreasonable length of time due to the additional cost; and
- the former employee may be less likely to breach the restriction or to take legal action if they are receiving compensation.
Other complementary measures proposed for option 1 include:
- introducing a requirement for employers to disclose the terms of any non-compete agreement prior to the employment relationship being entered into, failing which the clause would be unenforceable; and
- introducing a statutory maximum restriction on the period of non-compete clauses.
Option 2: Ban the use of post-termination non-compete clauses
Alternatively, the second option that the government suggests is a complete ban on non-compete clauses. The government’s view is that:
- this would be an effective boost to innovation and competition and provide greater certainty; but
- the scope of any ban would need to be clearly defined and consideration would need to be given as to whether there should be any exemptions.
The consultation asks for views on whether there could be other options short of banning non-compete clauses which would put limits on their enforceability.
The government is seeking views on a number of questions set out in the consultation to help inform its policy decisions on these options, including how employers would be impacted by any changes and how they would respond to a ban on non-compete clauses. Responses must be submitted by 26 February 2021.