Innovation and Non-Compete Clauses - Government Consultation
The Government is consulting on the use of post-termination non-compete clauses in contracts of employment The consultation could have a significant impact on an employer's relationship with its former employees or workers.
The consultation process is open until 26 February 2021. Details of the consultation can be found here.
What Are Non-Compete Clauses?
Post-termination restrictive covenants are a familiar part of most contracts of employment. The issues these clauses aim to address can be wide-ranging and the reason behind their use is principally to ensure the employer's business is protected. Restrictive covenants can include amongst many others:
- Non-solicitation covenants - For example these covenants seek to prevent an employee from actively seeking out and taking a former employer's customers or employees.
- Non-dealing Covenants. -These covenants take the non-solicitation restriction further and can prohibit goods or services being provided even where a customer has approached the former employee.
- Non-competition Covenants - These focus on preventing a former employee from setting up a competing business or moving to a competitor.
In the current climate of job uncertainty and a depressed GDP, the Government has identified non-compete clauses as potentially hampering innovation and competition. Following on from a 2016 Call for Evidence concerning non-compete clauses, the Government is now considering reforming the rules around these clauses. It is interesting that the Government's consultation focusses on the non-compete clauses rather than broadening the scope of the consultation to include other restrictive covenants which could be seen to hamper innovation and competition in similar ways.
In all cases, the validity of any post-termination restrictive covenant needs to be considered carefully and will turn on whether such a clause is reasonable and whether the covenant protects the employer's legitimate proprietary interest. As an employer, it is important to ensure these clauses are drafted correctly, if not, the clause could be unenforceable. If you have any concerns we can provide guidance on this, please get in touch via the details below.
What Are the Proposed Changes?
The Government has proposed two options:
- Option 1: making post-termination non-compete clauses enforceable only when the employer provides compensation to the employee for the period the clause covers
- Option 2: imposing a ban on the use of post-termination non-compete clauses.
The central ideas behind Option 1 are that it would:
- incentivise the employer to consider whether such a clause was actually required together with the length of time imposed; and
- former employees may be less likely to breach the restriction when they are receiving compensation.
Further complementary measures are proposed for Option 1, including the introduction of a disclosure requirement that would see employers disclosing the terms of any non-compete agreement prior to the employment relationship being entered into, and the introduction of a maximum period for non-compete clauses.
The central ideas behind Option 2 are that it would:
- provide certainty
- make it easier for individuals to start new businesses and the share skills and ideas
- increase employee moves between businesses.
What Can an Employer Do?
The Government is seeking responses to a number of questions laid out in the paper and it is possible to respond online, by email or in writing. Guidance on how to do this can be found here.
The Government's consultation is a useful reminder for all employers to take stock of how they use post-termination non-compete clauses, whether such clauses are legally enforceable and how they plan on using these clauses going forwards.