Alan Lewis of Constantine Law discusses the Government’s latest consultation
The Department for Business, Energy and Industrial Strategy has recently announced a consultation process on measures to reform post-termination non -compete clauses (“non-competes”) in contracts of employment with a closing date of 26 February 2021. ( Non-compete clauses: consultation on measures to reform post-termination non-compete clauses in contracts of employment (publishing.service.gov.uk) )
The consultation paper recognises that the law which applies to non-competes is part of the English common-law and continues to be developed by the courts on a case-by-case basis. There is no statutory regulation. Whatever happens as a result of this consultation exercise, this won’t result in a complete re-writing of the law relating to restrictive covenants. This consultation is only about non-competes it is not targeted at soliciting (or dealing with) clients/customers or employees and there appear to be no proposals to reform these types of restrictions (collective sigh of relief).
The paper points to the present presumption of unenforceability, so that all non-competes are presumed to be in restraint of trade and unenforceable, unless it can be shown that they are reasonable. A non-compete will only be reasonable and enforceable if: (a) it protects a legitimate business interest of the former employer and (b) is no wider than reasonably necessary to protect that legitimate business interest.
One of the options being considered by the government is to make non-competes enforceable only where the employer provides compensation for the period for which the clause prohibits the employee from working for a competitor or commencing their own business. This happens in other jurisdictions: for example, Hong Kong. The intention appears to be to encourage employers to make greater use of garden leave periods, when employees continue to be paid, rather than rely upon unpaid periods of restriction. The government is considering imposing a maximum period on the length of the non-compete clause and the clause would only be enforceable if it did not exceed that maximum. No indications have been given as to what periods would be appropriate.
The government is also suggesting that consideration be given to other measures, including enhancing transparency where non-competes are used and placing statutory limits on the length of non-compete clauses.
Consideration is being given to introducing a requirement for employers to disclose the exact terms of the non-compete to the employee in writing before the commencement of the employment relationship and if that were not done, the clause will be unenforceable. (Of course, many non-competes are negotiated during employment in return for benefits and bonuses).
A more radical option being considered by the government is to make all post-termination non-compete clauses in contracts of employment unenforceable. The intention is to boost innovation and competition. There is international precedent for this idea: California, home to some of the world’s most innovative organisations and tech businesses. In California, non-compete clauses are void, regardless of whether they are reasonable. Similarly, reference is made in the consultation paper to the position in Israel, which during the past 15 years, has become one of the most innovative and entrepreneurial countries in the world and where the courts have put significant limitations on the enforceability of noncompete clauses, again regardless of whether or not they are reasonable.
In our view UK companies that have invested significant time and resources into developing their key staff, products and services would be aghast at the thought that a soon as they have left, they were free to compete with the former employer. Perhaps the maximum limit on the length of non-compete restricted periods will be more welcome, but that does not get over the problem of different lengths of time being appropriate for different industry sectors. For instance, 2 months might be appropriate for someone working in the fashion industry where fashions change very quickly, but perhaps 6 to 9 months might be more appropriate for a senior accountant who leaves to join a rival business or to set up their own business.