Consultation closed: What’s next for non-compete covenants?
To support the UK’s economic recovery from the impacts of COVID-19 the government has been looking to boost innovation across many sectors, from encouraging the diffusion of ideas, to creating the conditions for new jobs and increased competition.
Non-compete clauses have therefore been a hot topic of conversation in recent weeks. Designed to protect employers, they can be inserted into employment contracts to restrict employees from joining a competing business for a specific period of time, following termination of their employment.
Their use is widespread, from multinational blue-chip companies to high-street hairdressers. Despite being common in UK employment contracts, non-compete clauses are essentially a restraint of trade, preventing individuals from working for a competitor, or from applying their entrepreneurial spirit to establish a competing business.
In light of this, the courts have adopted a strict approach when considering the enforceability of non-compete clauses. The clauses must do no more than is necessary to protect the legitimate business interests of the employer and the courts have generally been quick to find reasons why they go further than is necessary.
The onus is very much on the employer to persuade the court that the restriction is justifiable and to ensure that the clause is drafted accurately; even cases involving relatively minor drafting flaws or ambiguities can and have been dismissed.
Non-compete covenants a timeline:
While this judicial approach has significantly limited the impact of non-compete clauses, the Department for Business, Energy and Industrial Strategy (BEIS) recently ran a consultation on potential reforms. The government predicts two possible measures from the consultation, which closed on 26 February.
The first is to introduce mandatory compensation payable by the employer to the employee for the duration of the restriction (around 60-80% of the employee’s earnings, an approach already commonplace in many European countries); while the second is to ban non-compete clauses completely.
The consultation also envisages two possible complementary measures, one involving a requirement on the employer to disclose the exact terms of the non-compete clause in writing before employment begins. In most cases non-compete clauses are already included in employment contracts - meaning this requirement would already be met - but it’s unclear how this would work for clauses introduced during an individual’s employment for example following a promotion.
The second complementary measure would be to introduce a specific statutory limit on the duration of the non-compete restriction.
Currently, the potential duration is technically unlimited, although in practice the 'no more than is necessary' test outlined above means that restrictions in excess of 12 months are rarely found to be enforceable, and even considerably shorter durations will often be found to be excessive. BEIS acknowledges in the consultation paper that the impact of a specific limit is uncertain and could be self-defeating if it results in the maximum duration becoming the default.
While the results of the consultation hang in the balance, employers should be prepared for the possibility that the government will take forward the proposal to introduce an element of financial compensation.
This would likely result in most employers dropping non-compete clauses altogether and instead relying on a combination of garden leave provisions, longer notice periods, confidential information clauses, and less-onerous covenants such as those which prevent ex-employees from poaching customers.
The effects of COVID-19 have undoubtedly encouraged growth and innovation in all areas of business, something the government has taken on board. While there is little evidence to show that innovation is restricted by non-compete clauses, employers have a duty to ensure they are playing a key part in the UK’s economic recovery, whatever the outcome of the consultation.
Matt McDonald is partner and employment disputes specialist at law firm Shakespeare Martineau