In early December 2020, the UK government published a consultation on potential reforms to the law on post-termination non-compete clauses in employment contracts (“non-competes”). The proposals could, if implemented, have a significant negative impact on the ability of employers across a variety of sectors to protect confidential information, goodwill, and – arguably – certain intellectual property rights. The consultation closes in February 2021.
What are non-competes?
Non-competes seek to restrict an employee's ability to work for, or set up a business, that competes with that of his/her prior employer. Non-competes usually apply for a certain period of time after the employment relationship ends, and within certain geographical limits. They are a type of restrictive covenant; others include non-solicitation and non-dealing covenants that prevent an employee “poaching” or working with customers, clients or suppliers for a certain period after the end of employment. It seems clear that non-solicitation/dealing provisions are outside the scope of this consultation.
Why now?
The Government is keen proactively to address the impact of COVID-19 on the UK’s job market and seeks to "unleash innovation, create the conditions for new jobs and increase competition," by removing potential barriers to new employment and the establishment of competing businesses.
The perception that non-competes are an obstacle to labour market fluidity is understandable, though the law assumes that non-compete clauses are in fact unenforceable, unless they do no more than is reasonably necessary to protect a legitimate business interest of the ex-employer. A provision that simply sought to prevent an employee working for X, Y or Z competitor would almost certainly be unenforceable.
What is proposed?
Option 1 – A requirement that employers pay compensation - likely a percentage of the employee’s prior earnings in the range of 60-100% - to employees for the duration of a post-termination non-compete clause. This is the model adopted in many other European countries, including France and Germany.
The government believes that a compensation obligation would, among other things, encourage more responsible use of non-competes, and reduce litigation, since employees would not be disadvantaged financially during the period of restriction.
The government is also considering two "complementary" measures: the introduction of a requirement on employers to disclose the exact terms of a non-compete agreement to the employee in writing before entering into the employment relationship; and the potential imposition of statutory limits on the duration of non-competes (e.g. 3, 6 or 12 months).
Option 2 – A total ban on non-competes in the employment context, as in California and Israel. This would certainly provide greater certainty, though it would raise sharp questions for employers about the ability to protect confidential information, goodwill and other legitimate business interests from unfair exploitation by former employees.
The government is not currently looking at reforms to confidentiality clauses or intellectual property law. Clearly, however, employers may need to consider such alternative means of protecting business interests more deeply if non-competes are outlawed entirely, or further limited in application.
Covington’s international employment team will be tracking developments.
If you have any questions concerning the material discussed in this client alert, please contact the following members of our Employment practice.
Back
