Government responds to consultation on non-compete clauses

The Government has responded to its 2020 consultation on reforming non-compete clauses in employment contracts.

Three month limit on non-compete clauses

The response confirms the Government’s intention to limit the length of non-compete clauses to three months, announced earlier in May, and provides further details on that proposal. The three month limit will apply to non-compete clauses in employment and worker contracts, but not in wider workplace contracts, such as partnership and LLP agreements and shareholder agreements. The limit will not apply to other types of post-termination restrictions, such as non-solicitation, non-dealing and non-poaching clauses. When considering whether a non-compete clause of three months or less is enforceable, the normal common law principles of enforceability will continue to apply and the starting-point will be that the clause is unenforceable unless shown to be reasonable.

It is still not clear whether the three month limit will apply to all non-compete clauses, or only those entered into after the legislation is in force and whether longer provisions exceeding three months will be considered void, or only enforceable for three months.

Other options rejected

As regards the other options considered in the consultation, the Government has confirmed that:

• It will not introduce legislation making post-termination non-compete clauses in employment contracts enforceable only where the employer pays the employee compensation for the duration of the non-compete. While such a measure would have encouraged employers to consider whether the restriction was truly necessary and given employees a measure of financial stability, the Government considered it would not be appropriate to apply such a direct cost to businesses using non-competes at such a critical juncture in the country’s economic recovery. There could also be other negative consequences, such as employees being less inclined to challenge a non-compete, even where its terms are unlikely to be enforceable, and increased use of non-competes over garden leave to get a similar protection at a reduced cost
• It will not ban non-compete clauses in employment contracts. Although a ban would lead to greater freedom for employees to take up new employment and start businesses, better career progression, potential for higher wages and greater clarity for both employers and employees, the Government was not satisfied that these benefits would outweigh the risks and potential for unintended consequences. Examples of these include:
  • Increased use of other restrictive covenants (non-solicitation and non-dealing provisions), confidentiality clauses, intellectual property and garden leave provisions, which could lead to litigation shifting to these areas
  • Removal of deferred compensation and benefits from employees who join rival firms and
  • Reduced investment in training and upskilling workers

Although these consequences could flow from any measure to reduce the use of non-competes, the Government considers they would be more likely following a ban.

Guidance

The Government also intends to produce guidance in order to raise awareness about non-compete clauses and the law underpinning them.

Please contact us below if you need help with drafting or enforcing post-termination restrictions.