The End of Post-Termination Non-Compete Clauses?
Key Contact: Claire Knowles
Author: Adam McGlynn
In an attempt to bolster competition and innovation following the disruption of the Coronavirus pandemic, the Department for Business, Energy and Industrial Strategy (BEIS) has issued a consultation paper exploring ways to reform non-compete restrictive covenants in employment contracts. Non-compete clauses are already the most difficult restrictive covenants to enforce as they can easily amount to a restraint of trade if not specifically tailored to the employee. BEIS is of the opinion that, non-compete clauses are being used too readily by employers and are concerned that this will restrict flexibility in the labour market, slowing the UK’s economic recovery. Currently, BEIS is considering two options for reform.
Option one is to legislate that post-termination non-compete clauses will only be enforceable where the former employer provides compensation for the restrictive period, as is the case in some European countries. The intention with this option is to discourage arbitrary use of non-compete clauses and compensate the employee for limiting their freedoms following termination. It would also provide greater certainty on the enforceability of the non-compete clause, reducing the likelihood of litigation. Proposed supporting measures include providing greater detail on the clause prior to the individual commencing their employment and placing statutory limits on the maximum length of the restrictive period. From the consultation paper and case law on the subject, BEIS may consider limiting non-compete clauses to a maximum of 12 months, which is the longest restrictive period the courts are usually willing to enforce. To ensure that the statutory maximum does not become the presumed norm, BEIS also propose requiring greater compensation from employers for non-compete clauses spanning longer periods.
Ban Non-Compete Clauses
Option two follows the example of some US states by proposing to make all post-termination non-compete clauses unenforceable. This would provide the greatest degree of certainty; however, it removes a business’ ability to genuinely use a non-compete clause as a proportionate means of protecting its interests. BEIS could consider including exceptions to allow for justifiable uses, however, this would merely return to the current state of the law where non-compete clauses are considered unenforceable, as a restraint on trade, unless they are proved to be appropriate. BEIS have clearly anticipated that many businesses will be against this option and so have also asked for suggestions of greater limitations for non-compete clauses which fall short of an outright ban.
The Government published a call for evidence in 2016 on this topic of codifying limitations on non-compete clauses but decided not to take any further action. In the wake of the Coronavirus pandemic and the UK’s departure from the EU it is far more likely that the Government will take action to promote flexibility in the labour market and competition between businesses. It seems unlikely that post-termination non-compete clauses will become unenforceable in their entirety, however, limitations on their length and the introduction of mandatory compensation would be unsurprising. The deadline for responses is 26 February 2021 with no follow-up timescale published at this time.
If you would like to know more about restrictive covenants or have an opinion that you would like the BEIS to consider, please feel free to contact our employment team.