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New employer restrictions on non-compete and exclusivity clauses proposed

  • United Kingdom
  • Employment law

04-12-2020

The Government is consulting on restricting the use by employers of exclusivity and post-termination non-compete contract clauses in a bid to “boost innovation” amidst the effects of the pandemic. The consultation does not propose changes to confidentiality, non-solicitation, non-dealing, non-poaching and other forms of restrictive covenant clauses.

Post-termination non-compete clauses

Legal background

Non-compete clauses are used by many employers to restrict an individual’s ability to work for a competing business, or to establish a competing business for a defined period after they leave.

The starting point for non-compete clauses is that they are void as being in restraint of trade. The courts have modified this position in a developing body of case law so that it is possible to impose such restrictions where there is a legitimate proprietary interest to protect and the restraint itself is drafted in such a way as to be no more than reasonable having regard to public interest and the interests of the parties. If the restriction is too long or too wide or otherwise unreasonable the courts will strike it down.

Given this context, an ex-employee may be reluctant to take the financial risk of litigation, because, if the employer wins, the legal fees might be substantial and unaffordable by the ex-employee.

Government proposals

Despite reviewing non-compete clauses in a similar consultation in 2016, the Government explains that the impact of COVID-19 is causing it to reconsider options for reform. These options include:

  • making post-termination non-compete clauses enforceable only when the employer provides compensation (e.g. between 60%-100% of average weekly earnings) during the term of the clause, in order to discourage their widespread or unreasonable use, and
  • introducing measures to enhance transparency and communication where non-compete clauses are used, such as mandating the disclosure of non-compete terms before commencing work, and
  • placing statutory limits on the length of non-compete clauses (e.g. a period of up to 12 months, after which the clause becomes unenforceable), or
  • making all non-compete clauses unenforceable, with some limited exceptions

Extending restrictions on exclusivity clauses

The Government is also seeking views on a proposal to extend the ban on exclusivity clauses to contracts where the workers’ guaranteed weekly income is less than the Lower Earnings Limit, currently £120 a week (equivalent to 13.76 hours worked at the National Living Wage). Exclusivity clauses typically stop workers working elsewhere, or require prior consent from their employer.

Currently, there is an existing “ban” on using such clauses in zero hour contracts. This works by making such clauses void and unenforceable and providing employees protection from dismissals or detriments for non-compliance. The regulations restricting exclusivity in zero hour contracts provide the power to extend the ban further – in the way the Government is proposing.

The Government’s explanation for acting now stems from COVID-19. Specifically, that low-income employees whose hours have been cut should be allowed to supplement their hours (and earnings) by seeking additional work from another employer.

In order to exclude higher-paid individuals who only work a few hours a week from this change, the Government is proposing an exemption by setting an hourly wage cap at an appropriate level (the consultation suggests between £20-£29/hour).

Implications for employers

The consultation on non-compete clauses, in particular, will be a concern to employers, both practically and legally.

Practically, if the Government acts to ban or severely restrict non-compete clauses, it could have the opposite effect: innovation may be stifled if employers feel unable to protect their business from key employees leaving and setting up in competition.

Legally, the options proposed by the Government are complex and may have unintended consequences, as the consultation admits, such as where an employer unilaterally waives a non-compete clause to avoid compensation.

In the meantime, employers would be well advised to act now to ensure that:

  • confidentiality and intellectual property provisions are shored up in their contracts of employment
  • contracts of employment contain garden leave provisions
  • notice periods are of sufficient longevity to protect the business
  • the use of non-compete clauses in non-employment contracts are assessed in light of the consultation proposals to go beyond employees (to consultants and other workers)

The consultations on exclusivity and non-compete clauses close on 26 February 2021.