No competition – no progress?

Employment lawyer Lucy Flynn, part of the Employment team within the Group’ specialist corporate firm Beyond Corporate, examines the proposed reforms to the law surrounding post-termination non-compete clauses in employment contracts, and considers what any changes might mean for employers.

 

First published in Business Insider North West
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Back in May 2016, the government launched a call for evidence on the use and impact of non-compete clauses in employment contracts – specifically seeking views from workers and businesses on whether such clauses constrained innovation, limited entrepreneurship and stifled the developing start-up economy.

For the purposes of seeking responses, the definition of a “non-compete” clause was widely defined and included, not just the traditional blanket non-compete clause, but other types of post-termination restrictions such as non-dealing with customers and non-solicitation of employees.

Protection of the employer’s legitimate business interests

Case law developed over many years against a backdrop of encouraging flexibility and healthy competition in the labour market had established that non-compete clauses in employment contracts could go no further than was necessary to protect the employer’s legitimate business interests. As such, the government’s stated aim of ensuring that non-compete clauses in employment contracts were justified, well-constructed and reasonable came as something of a surprise to commentators and lawyers alike.  The, perhaps predictable, overall response was that non-compete clauses were a necessary tool and sufficiently balanced business interests against the ability of individuals to find work.

Government consultation

Fast forward to 4 December 2020 and the government issued another call for evidence by launching a further consultation on options to reform post-termination non-compete clauses in contracts of employment in order to support economic recovery from the impacts of COVID-19…boost innovation, create the conditions for new jobs and increase competition.

The gov.co.uk website confirms that the purpose of the consultation is to seek views on two alternative proposals as follows:

* 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 clause

* an alternative proposal to make post-termination, non-compete clauses in contracts of employment unenforceable

The consultation paper sets out that the government is particularly interested in the first proposal; namely making it mandatory for employers to financially compensate employees during any period of restriction. Commentators have opined that the mandatory compensation route, rather than a complete ban on non-compete clauses is potentially more advantageous in that it could:

* encourage employers to consider more carefully whether a non-compete clause is necessary and reasonable for that particular role

* create a financial disincentive for automatic inclusion of a non-compete clause, either at all or for long periods post-termination

* reduce litigation – and the associated costs – between employers and ex-employees

* remove the psychological barrier to finding a new role during periods of restriction

* still allow employers to protect their business interests, post-termination

* ensure restricted employees are compensated for any period during which they cannot join or start a competing business

Furthermore, there has long been a comparison with other regimes, including Germany – where 50% compensation must be paid in monthly instalments to enforce restrictive covenants for up to 2 years; Italy – where there is no prescribed amount of compensation but it is considered as part overall reasonableness of the clause; and France – where the amount of compensation is typically between 25% and 60% and should be paid monthly throughout the period sought to restrict.

The consultation closed on 26 February 2021 and sought views on various aspects of both proposals, such as:

* whether compensation should be made for enforcement of pure non-compete clauses only or for non-compete clauses and other restrictive covenants

* whether the proposed requirement for compensation should be widened to other workplace contracts, such as consultancy agreements, partnership agreements or LLP agreements

* what level of compensation would be appropriate – and 60%, 80% and 100% were provided as suggested options

* whether there would be support for a maximum term of a non-compete – and 3, 6 and 12 months were given as suggested options

* whether mandatory compensation would prevent use, by an employer, of non-compete clauses

* whether mandatory compensation for enforcement of a non-compete clause would incentivise an increased use of other restrictive covenants

* whether employees would be more likely to comply with terms of a non-compete clause if mandatory compensation was introduced

* whether there are benefits to a total ban on non-compete clauses, and if so, what they are

* whether there would be support for a total ban

The outcome of the consultation is now awaited.

Wholesale ban on non-compete clauses thought unlikely

Despite possible advantages of removing barriers to starting new ventures and creating certainty for all parties, a wholesale ban on non-compete clauses is thought to be very unlikely.  Furthermore, any move away from the current regime to one governed by statute which creates financial obligations on employers could be unpopular with businesses seeking to protect their interests and currently able to do so by using well-established contractual principles.

However, what is clear is that in the last year 700,000 people have lost their jobs, the economy shrank by almost 10% and borrowing is up.  Despite forecasts that economy will grow this year by 4%, by 7.3% in 2022, then 1.7%, 1.6% and 1.7% in subsequent years, the UK labour market is in a precarious position.  Furlough has been extended to the end of September 2021 – and for some that could mark 18 months of reduced or no work – and the Self-Employment Income Support Scheme has been extended again.  The government needs to boost innovation and opportunity within the labour market and it may be that removing barriers to competition is the chosen route.

If you are affected by any of the issues outlined above, please get in touch today. We are here to help you.