Non-compete clauses: change afoot prompted by COVID-19

United KingdomScotland

The UK Government has today announced a consultation on proposals to reform the enforceability of non-compete clauses in employment contracts. If these proposals are taken forward, they would fundamentally alter the way in which businesses can protect their confidential information, customer connections and skilled workforces when staff members move to competitors.

Why is the Government looking at non-compete clauses?

The Government states that the proposals are intended to counteract the negative effects on the economy and the increasing rates of unemployment as a result of the COVID-19 pandemic. BEIS looked at these types of restrictions in 2016 in a call for evidence, concluding 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 took no further action at that time. The Government now states that it is looking to “unleash innovation” and mirror innovation hub jurisdictions such as California and Israel, which do not enforce non-competition obligations.

What are the proposals?

The consultation document outlines two proposals:

Option one – mandatory compensation

Non-compete clauses would only be enforceable where the employer provides the departing employee with compensation for the period of restriction. This could equate to a proportion of their remuneration before termination, or possibly a legislatively set amount. This approach is already common in France, Italy and Germany.

As well as mandatory compensation, the Government is considering complementary measures that would:

  • enhance transparency by requiring an employer to disclose the terms of any non-compete clauses to an employee in writing before they commence work for an employer (rather than, as sometimes can occur, employers providing employment contracts after employment has commenced); and
  • place a statutory limit on the length of non-compete clauses in contracts of employment.

Option two – ban non-compete clauses

Legislation would be passed to render all post-termination non-compete clauses unenforceable, along with other options that fall short of this. It is argued that this could provide enhanced certainty for all parties. The Government acknowledges that there are many arguments in opposition to this proposal, but considers the examples of this approach in California and Israel to be persuasive.

Potential impact

If any of the proposals are adopted, it would be the first time that the use of non-compete clauses in the UK is subject to legislation. Any of the proposals mooted would significantly alter the current common law position on enforceability of post-termination restrictions. Businesses would therefore need to adapt how they protect themselves to prevent staff from using valuable confidential information or customer relationships, or poaching skilled staff when they join new employer.

The consultation explicitly states that it is not considering confidentiality obligations or intellectual property protections. However, these go hand in hand with the regime on post-termination restrictions. If employers are prohibited from using post-termination restrictions in some form or another, they will need to fall back on other ways to protect their businesses. For example, they should ensure that their other contractual protections and operational practices go as far as they can to ensure that, in particular, confidential information and trade secrets cannot be extracted from the business unlawfully. If post-termination restrictions are permitted but in a more limited form than currently, businesses will face a significant task in updating and implementing their contractual protections.

The consultation also indicates that its focus is on employment contracts, rather than LLP agreements, franchise agreements, consultancy agreements and share options arrangements. It does not mention restrictions on outgoing shareholders in corporate transactions (who are often also employees), which are subject to a similar legal regime, but with nuanced differences. It remains to be seen what remit any new legislation would have, and whether this might encourage businesses to deploy these types of restrictions in other formats that are not so closely connected with the employment relationship.

Next steps

The consultation is open for responses until 26 February 2021. Businesses should keep a watching brief on this potentially significant change in law.