The end of post termination restrictions in employment contracts?
At the end of last week, the Government opened consultation on options for reforming post termination non-compete clauses in employment contracts.
We have been here before, most recently in 2016, when the Government published a Call for Evidence on how and why non-compete clauses are used, exploring whether or not they restrained entrepreneurship. Although the Government did not take any action at that time, finding the law in this area to be “well calibrated”, the impact that COVID-19 has had on the UK’s labour market has prompted the Government to look again at measures which seek to unleash innovation, create the conditions for new jobs and increase competition.
The Government is consulting on a number of options which include:
- making post termination non-compete clauses enforceable only when the employer provides compensation, for example anywhere between 60 to 100% of average weekly earnings, for the duration of the non-compete clause;
- introducing measures to enhance transparency and communication about the way in which non-compete clauses are used, for example requiring employers to explain the terms of the non-compete clause before the employee signs the contract of employment;
- placing statutory limits on the duration of non-compete clauses, for example up to a maximum of a number of months after the date of termination of employment; and
- making all non-compete clauses unenforceable.
While the primary focus of the Consultation Paper is very much on non-compete post termination restrictions, the Government is also seeking views on similar reforms to the standard non-solicitation, non-dealing and non-poaching clauses often found in employment contracts alongside non-competition clauses.
The consultation closes on 26 February 2021.
Many commentators feel that the law in relation to non-compete clauses in employment contracts has been adequately honed by our courts over the past 600 years, striking the right balance between the rights of employees and the needs of business, and that there is a risk of unforeseen consequences in intervening in well established legal principles.
Others have raised concerns that any reforms would lead to short-term business thinking and undermine the ability of businesses to protect their long term interests.
On the flip side, founders, innovators and entrepreneurs feel that the law on non-competes should be changed and reform is well overdue. While our judges have carefully honed legal principles, each case turns on its facts and individuals are significantly deterred from challenging the enforceability of non-competition restrictions due to the legal costs of defending a claim and the risk of having to pay their former employer’s costs should they lose. They would argue that those with the deepest pockets should not be able to use their resources to stifle competition.
Further, as the Government points out, there is a ban on non-compete restrictions in California and, in France, Germany and Italy, the employer needs to pay compensation to the employee if it seeks to use a non-compete restriction. These are all successful Western economies where innovation and investment is not held back by less onerous non-compete laws.
The Government does not propose changes to the laws protecting business confidential information, business intellectual property or other means to protect legitimate business interests.
There is a balance to be struck between the incentivisation of investment in key individuals, start-ups and growing businesses against encouraging innovation, creativity and competition to stimulate growth in a post COVID, post Brexit, British economy.
Boris is a disruptor so we expect there to be change. If you do wish to add your views on the potential changes, you can do so here:
In the meantime, if you would like any advice on the enforceability of your post termination restrictions, then please do not hesitate to get in touch with Neil Johnston, Leanne Good or Céline Winham.