Consultation opens on the use of non-compete clauses in Contracts of Employment
19th January, 2021
On 4 December 2020, the Department for Business, Energy & Industrial Strategy (BEIS) launched a new consultation on the use of non-compete (or non-competition) clauses in contracts of employment.
The BEIS are inviting respondents to provide their views on:
- “Proposals to make non-compete clauses enforceable only when the employer provides compensation during the term of the clause, and whether this could be complemented by additional transparency measures and statutory limits on the length of non-compete clauses; and
- An alternative proposal to make post-termination, non-compete clauses in contracts of employment unenforceable.” Source.
The consultation forms part of an attempt by the UK government to revive the economy and create a more competitive job market. The impact of the Covid-19 pandemic has seen rates of unemployment rising, and high levels of redundancies. Gross Domestic Product fell by a record 19.5% in April 2020, and although it is expected to recover in 2020, growth is currently slow. The new lockdown restrictions introduced in December 2020 and early 2021 will continue to impact upon the general economy. It is hoped that by introducing new innovative measures that this will stimulate the jobs market.
Several options are being considered relating to non-compete clauses, including:
- a mandatory financial compensation for former employees during any period where post-termination restrictions will apply;
- a requirement for employers to fully disclose the exact terms of any non-compete clauses prior to their entering into the employment relationship;
- statutory limits on the length of a non-compete clause; and
- consideration is also being given to whether non-compete clauses should be made entirely unenforceable.
Inclusion of Non-Compete Clauses in Employment Contracts
Non-compete clauses form part of a group of post-termination restrictive covenants which are commonly found in contracts of employment. Post-termination restrictive covenants are intended to protect the employer’s position, by restricting the former employee’s ability to use confidential information, customer contacts or supplier information gained during their employment, to compete with the employer following termination. They will typically apply for a defined period, which will generally reflect the seniority of the former employee, as well as the level of customer contact the employee during employment.
These types of restrictions cannot be applied indiscriminately, they must be appropriately drafted and reasonable to be enforceable. The employer must be able to show that there is a legitimate business interest which they are seeking to protect by use of the restriction, as well as show that the restraint is no wider or longer than is reasonable to protect that legitimate interest. These considerations are generally very fact and circumstance-specific and employers who intend to include such clauses in their contracts of employment should take specialist legal advice to ensure that they are appropriately drafted. The onus is on the employer to show that the clauses are no wider than necessary in the event of a dispute between the parties.
Non-compete clauses are notoriously difficult for employers to enforce in the event of a dispute following termination. A non-compete clause seeks to restrict an employee’s ability to find a role with a rival business for a specific time and within a specific area following termination. To be enforceable, employers will need to show that it is not possible to sufficiently protect a legitimate interest through other terms in the employment contract. For example, if there was a trade secret which would not otherwise be protected by a confidentiality clause. A non-compete clause may also be enforced where the employee had a high degree of influence over customers or suppliers.
The proposals to restrict an employer’s ability to include this type of restriction in an employee’s contract of employment could make it more difficult to protect commercially sensitive information. In some sectors, this type of restriction is particularly common, including manufacturing and companies involved in sales. Should the consultation result in a change in the law, then this is likely to place greater emphasis on the strength of confidentiality and other applicable clauses in the employee’s contract.
The consultation document prepared by the government suggests that the proposed changes would have a positive impact upon the employee, enabling individuals to pursue new job opportunities or establish their own businesses without the restrictions imposed by this type of clause. They may also serve to increase competition and it is hoped that any such changes will also impact positively upon the economy. Onerous restrictions in contracts can significantly restrict a person’s ability to seek new employment, particularly in certain job sectors.
The consultation remains open until 26 February 2020. A consultation document can be found on the gov.uk webpage which sets out further detail on the proposal. The proposal document includes model questions for employers to consider when responding to the consultation.
The outcome of the consultation is expected to be published later in 2021 after the deadline for responses has passed. The government will then consider whether to introduce new measures restricting the use of such clauses. Whilst this decision is awaited, non-compete clauses can continue to be used; however, employers may wish to consider whether to strengthen other applicable contractual terms. Employers who wish to include this type of restriction in an employee’s contract of employment should consult with a specialist employment lawyer to ensure that it will provide the protection required and will be enforceable following termination.
Employment Law Senior Associate