Guides & Advice

The future of non-compete covenants | consultation closes 26 February 2021

Published: 25th January 2021
Area: Corporate & Commercial

Non-compete clauses aim to protect employers by preventing employees from joining a competitor for a specific period of time following their termination of their employment and are relatively common in UK employment contracts. However, in December 2020 the Department for Business, Energy and Industrial Strategy (BEIS) opened a consultation on potential reforms to these types of clause. The stated rationale behind the proposed reforms is to “support economic recovery from the impacts of COVID-19” and “boost innovation, create the conditions for new jobs and increase competition.

Background to the proposed reforms

Despite these clauses being commonplace in employment contracts, particularly those for senior employees, they are somewhat controversial. They can be seen to be fundamentally anti-competitive and in some instances can effectively prevent an individual from earning a living, particularly if an employee’s skills and the market in which their employer operates is such that if the individual was to move jobs it would, short of a complete career change, inevitably result in them joining a competitor.

In light of these concerns, the courts have often taken a rather uncompromising approach when determining the enforceability, or otherwise, of non-compete clauses. In broad terms, the clause must do no more than is necessary to protect the legitimate business interests of the employer, and the courts have generally been quick to find reasons why a clause goes beyond what is necessary.

The onus is very much on the employer to show the restriction is justifiable, and relatively minor flaws and/or ambiguities in the drafting of clauses have often resulted in findings of total unenforceability.

As such, the approach taken by the courts has significantly limited the impact of non-compete clauses but despite this, in December 2020, the Department for Business, Energy and Industrial Strategy (BEIS) opened a consultation on potential reforms to non-compete clauses. The stated rationale behind the proposed reforms is to “support economic recovery from the impacts of COVID-19” and “boost innovation, create the conditions for new jobs and increase competition.” It is unclear what evidence there is that innovation is restricted by non-compete clauses as employers primarily use them as a means of protecting their own confidential information.

What are the proposals?

The consultation envisages two possible measures,

  • to introduce mandatory compensation payable by the employer to the employee for the duration of the restriction, which mirrors the position taken in a number of European jurisdictions including France and Germany. BEIS is to some extent keeping an open mind about the amount payable, but the consultation envisages between 60% and 100% of the employee’s earnings; and
  • to ban non-compete clauses completely, however, it is very unlikely to be an avenue that the government pursues.

The consultation also envisages two possible complementary measures the first being a requirement on the employer to disclose the exact terms of the non-compete clause in writing before an employment relationship starts. However, here are a couple of issues with this proposal. Firstly, in most cases non-compete clauses are included in the contract of employment, so without more this requirement would already be met. Secondly, it is unclear the impact this requirement would have on existing non-compete clauses and those that might be introduced during an individual’s employment (following a promotion, for example).

The second complementary measure is to introduce a specific statutory limit on the duration of the non-compete restriction. Currently, the potential duration is technically unlimited, although in practice the “no more than is necessary” test outlined above mean that restrictions in excess of 12 months are rarely found to be enforceable, and even considerably shorter durations will often be found to be excessive.  The impact of a specific limit is therefore doubtful, and it could be self-defeating if it results in the maximum duration becoming the default, something acknowledged by BEIS in the consultation paper.

What is the likely outcome of the consultation?

It is entirely possible that nothing will come of the proposals, not least because the approach taken by the courts has been effective in blunting the impact of non-compete clauses. Businesses such as hairdressers have used non-compete clauses to avoid losing customers to former staff by preventing them opening up a rival business locally which is clearly not about innovation at all.

However, there is clearly scope for unscrupulous employers to use the threat of legal action unfairly to prevent employees from joining competitors and while there may be a technical argument that the clause relied upon is unenforceable, many employees will not have the appetite or the financial resources for the fight.  Experience suggests that only a very small proportion of disputes in this area end up in court.

It is a distinct possibility that the Government will take forward the proposal to introduce some element of financial compensation, although it is not clear yet what form that might take. In all likelihood this would result in most employers dropping non-compete clauses altogether and relying instead on a combination of garden leave provisions with longer notice periods, confidential information clauses and other, less-restrictive covenants such as those which prevent ex-employees from poaching customers.

How to get involved

Anyone wishing to respond to the consultation, which closes on 26 February 2021, can do so here.

For further information on non-compete covenants, or any other employment law issue, please contact Matt McDonald or another member of the employment team in your local office.

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