Non-compete clauses could be banned under Government proposals for reform
The Department for Business, Energy and Industrial Strategy is considering reforms to post-termination non-compete provisions in employment contracts. It has opened a consultation seeking views on proposals, including requiring employers to pay employees for the duration of the restriction, introducing a statutory limit on the length of the restriction or making all post-termination non-compete provisions unenforceable. It also considering whether to reform other post-termination restrictions in future.
Why the reforms?
The Government originally sought views on restricting the use of non-compete provisions in 2016 but did not take any action. The revival of the consultation is, in part, a reaction to the crisis in the labour market caused by Covid-19. The Government is keen to explore ways to boost innovation, create the conditions for new jobs and increase competition.
The consultation paper states that “non-compete clauses can act as a barrier by preventing individuals from working for a competing business, or from applying their entrepreneurial spirit to establish a competing business”. The Government wants to maximise opportunities for individuals to start new businesses, find new work and apply their skills to drive the economic recovery.
What is proposed?
The consultation focuses on two main proposals:
- Mandatory financial compensation - a non-compete provision would only be enforceable if the employer pays the employee for the period of the restriction. The Government is considering what a reasonable level of compensation would be. The consultation paper states that the level of compensation needs to be high enough to deliver the aims of encouraging employers to consider whether a non-compete is necessary for a particular role and creating a financial disincentive to using them. It proposes using a percentage of the former employee’s average weekly earnings prior to termination.
- This proposal would be complemented by additional transparency measures requiring an employer to disclose the terms of the non-compete agreement to the employee in writing before the start of employment and statutory limits on the length of the restriction.
- Making all post-termination non-compete clauses in employment contracts unenforceable. The Government notes that in California and Israel, two regions renowned for innovation, non-competes are either void or their enforceability has been significantly limited by the courts, regardless of their reasonableness.
The consultation closes on 26 February 2021 and the findings could lead to a significant shift in the current legal framework. For the first time, the regulations governing non-compete provisions could be governed by statute rather than common law.
While the consultation paper focuses primarily on non-compete provisions, the paper also asks if the Government should consider similar reforms for other restrictive covenants (including non-solicitation, non-dealing and non-poaching clauses), meaning a far broader reform of restrictive covenants could be on the horizon.
The consultation is likely to mark the beginning of long process of reform and it could be some time before any changes come into force.
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