Should post-termination non-compete clauses be prohibited?

Non-compete clauses are often used in contracts of employment to restrict an ex-employee’s ability to work for a competing business for a set period of time after the end of their employment. To be enforceable, non-compete clauses must be no wider than reasonably necessary to protect an employer’s legitimate business interests.

BEIS has opened consultation on measures to reform post-termination non-compete clauses in contracts of employment. The consultation states that the option is being explored to “maximise opportunities for individuals to start new business, find new work and apply their skills to drive the economic recovery”.

Non-compete clauses – the options

The purpose of the consultation it to seek views on the following options:

Option 1: Mandatory compensation.

The Government is considering making post-termination non-compete clauses in contracts of employment enforceable only when the employer provides compensation for the period of the restriction. The consultation document states that applying mandatory compensation:

would encourage employers to consider whether the use of the non-compete clause is necessary and reasonable for that particular role before including it in the contract of employment;
would disincentivise the use of such clauses as standard; and the use of such clauses for an unreasonable length of time;
could benefit the employer and employee by reducing litigation;
could give rise to greater use of garden leave and other indirect restraints.

To complement mandatory compensation, other measures are also explored, as follows:

Enhanced transparency – a requirement for employers to disclose the exact terms of the non-compete agreement to the employee in writing before they enter into the employment relationship.
A statutory limit on the length of non-compete clauses – so that the clause would only be enforceable if it did not exceed that maximum period.

Option 2: Ban non-compete clauses

As an alternative to the first option, the Government is considering whether making all post-termination non-compete clauses in contracts of employment unenforceable is a necessary step to boost innovation and competition. The Government considers that this could:

Provide greater certainty for all parties.
Have a positive effect on innovation and competition by making it easier for individuals to start new businesses, enabling the diffusion of skills and ideas between companies and regions, and increasing labour mobility.

Comment

Non-compete clauses are frequently used in contracts of employment, particularly for senior employees. They can be valuable where other types of restrictive covenants do not offer sufficient protection to employers’ legitimate business interests. Other restrictive covenants can include non-solicitation (don’t contact customers), non-poaching (don’t take employees) and non-dealing clauses (don’t deal with customers even if they make the approach). The consultation also seeks views on whether the Government should consider requiring mandatory compensation or a ban in relation to non-compete clauses only, or in relation to other restrictive covenants.

Employers considering including non-compete clauses in their contracts of employment must give careful consideration in each case to the reason for their inclusion and the scope of the clause. We advise employers on employment documentation including contracts of employment. Contact us to find out more.

Consultation closes on 26 February 2021.

18 December 2020

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