In this article, Employment Solicitor Will Chrusciel looks at non-compete clauses and the two approaches that the Government is currently considering in order to minimise any “unhealthy competition” in the current climate.
On 04 December 2020, the UK Government kick-started a formal consultation inviting comments from employers on proposals to reform the law surrounding post-termination non-compete clauses in employment contracts. In the wake of the economic turmoil caused by the Covid-19 pandemic, the Government's ultimate aims are to “unleash innovation” and “maximise opportunities for individuals to start new businesses, find new work and apply their skills to drive our economic recovery”.
A non-compete clause – just one type of Post Termination Restriction
A non-compete clause is a contractual restriction that seeks to prevent an employee from working for a competitor (or starting up as a competitor) of their employer, for a specified period of time after service with that employer has ended. The purpose of such a clause is usually to protect an employer’s legitimate business and proprietary interests, including, its trade secrets, confidential information, goodwill and customer connections.
Most commonly, such a restriction is contained in an individual’s employment contract and is therefore "entered into” around the time when the employee commences with the employer but they can also be found within shareholder documents, long term incentive plans and share schemes.
A non-compete clause is just one of a number of "Post-Termination Restrictions" (PTRs) – also called restrictive covenants - that can be incorporated into employment contracts which seek to stop an employee from doing certain things after their employment has ended. Another example of a PTR is a “non-solicitation” clause - which seeks to prevent an outgoing employee from soliciting away clients or business contacts.
What is the current approach to PTRs (including non-compete clauses)?
PTRs are governed by common law not statute and this means the courts deal with issues concerning PTRs on a case-by-case basis on the relevant facts and circumstances.
To strike a balance between an individual’s right to work freely, and protecting the legitimate interests of employers, a PTR is void as in restraint of trade unless the employer can show that its purpose is the protection of its legitimate business interests and the restriction goes no further than is reasonably necessary for that purpose.
Through a consultation ending on 26 February 2021, the Government is floating two alternative measures on reform to non-compete clauses:-
1. The “Continental option” – this measure involves ensuring that post-termination non-compete clauses are only valid when the employer provides compensation for the period during which the individual is unable to work for a competitor (or start up as a competitor). This is the approach already taken by France, Italy and Germany.
As part and parcel of the consultation, the Government also invites comment on two “complementary measures” that could work in tandem with this option - including introducing a requirement for employers to set out to employees in exact detail the non-compete arrangement that they are asking the employee to enter into (before joining), and placing statutory time-limits on the length of non-compete clauses.
The Government believes the following to be advantages of the Continental option:-
- Provides a disincentive to a blanket inclusion of non-compete clauses in employment contracts – leading to a more targeted approach by employers.
- Provides an incentive for employers to limit non-compete clauses to a reasonable length.
- Reduces costly litigation for all parties (as former employees will be remunerated resulting in a higher likelihood of compliance with a restriction).
- Provides greater certainty for both parties as to whether a clause is enforceable.
2. The “Californian option” – this measure involves legislating for an outright ban on post-termination, non-compete clauses – as in California.
The following are said to be advantages of the Californian option:-
- Makes it easier for start-ups to be created, and enables the “diffusion of skills and ideas between companies and regions, which can in turn impact economic growth”.
- Increased efficiency of labour markets generally – as skills and experience will be spread further and wider.
- Certainty for all parties as to their legal position.
In inviting comment on the Californian option, the Government has said that they recognise that a ban would need to be clearly defined and may contain exemptions. It also conceded that there was a need to protect employer’s legitimate interests and has consequently opened the floor to “views on targeted and specific reforms to post termination non-compete clauses”.
Although many may view the Californian way of life to be an aspiration, it is very unlikely that this approach to non-compete clauses will be popular among UK employers seeking to protect their businesses and business assets. Some legal commentators have also suggested that the total abolition of non-compete clauses may actually result in fewer enterprises being based in the UK – for there would be less to deter staff turnover, and less to prevent key individuals from joining a competitor or using their experience to set up on their own.
The Continental approach may also be unlikely to gain much fandom among UK employers, as this option entails greater expense for employers trying to protect their interests due to the requirement to pay ongoing “compensation”. However, in some sense this may be counteracted by the greater certainty provided to the employer of the enforceability of the restriction in question. Employers navigating the current system often have to seek specialist advice and/or an injunction to enforce a PTR, and a clearer position might reduce the costs associated with these steps.
Employers may be supportive of a new requirement to provide details of the non-compete arrangement in exact terms to an incoming employee from the outset (one of the “complementary measures” detailed in the consultation) – as this is likely to promote clarity and avoid misunderstandings.
The last time the Government undertook a consultation exercise into the law and practice of PTRs the preponderance of responses was that the delicate balance represented by the common-law approach worked well and should be left alone (and no action was taken). It remains to be seen whether the return to consultation a mere 4 years later presages a more interventionist approach this time round.
Expert legal advice
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