Employment and Immigration Law Update – Government consultation: restrictive covenants

A new consultation has been published on measures to reform post-termination non-compete clauses (restrictive covenants) in employment contracts.

In 2016, following a ‘call for evidence’ on the use and impact of such clauses, the Government concluded that they were a valuable and necessary tool for employers in protecting their business interests and it was not necessary to take any further action.

The Government is now once again exploring the option of restricting the use of non-compete clauses, as part of efforts to maximise opportunities for individuals to start new businesses and find work following the COVID-19 pandemic. Whilst the proposals focus on the use of non-compete clauses, which restrict an individual’s opportunity to work for or establish a competing business, the consultation also considers whether restrictions should be introduced in relation to other post-termination provisions such as non-solicitation and non-dealing clauses.

Key proposals set out in the consultation paper are as follows:

• Mandatory financial compensation. Making post-termination non-compete clauses in employment contracts only enforceable where the employer provides compensation for the duration of the clause, as currently applies in Germany, France and Italy. It is thought that this would discourage the widespread and unjustified use of non-compete clauses by employers and limit their use only where necessary for a particular role. It is also anticipated that this option would reduce the volume of litigation around the enforcement of such restrictions. The consultation is seeking views on the appropriate level of compensation, set as a percentage of the ex-employee’s average weekly earnings. It also seeks views on whether employers should have the option of waiving the non-compete clause early.
   
• Enhancing transparency and communication. A requirement for employers to disclose the terms of a non-compete agreement in writing before they enter into the employment relationship. A failure to do so would make the clause unenforceable. It is not clear how the Government intends this to work in practice, since contractual non-compete clauses are set out in writing in the employment contract. It would perhaps mean a form of clear, ‘plain English’ communication of the terms of the restriction at the point of making an offer of employment.
   
• Maximum length of non-compete clauses. Introducing statutory restrictions on the maximum length of post-termination non-compete clauses. Suggested limits are three, six or twelve months.
   
• Prohibiting the use of non-compete clauses. As an alternative to the proposal that employers pay compensation for the duration of a non-compete clause, the Government is considering whether to prohibit the use of such clauses in employment contracts altogether. They consider that this would provide greater certainty for all parties and have a positive effect on innovation and competition, but also recognise that consideration would need to be given to whether any exemptions should apply.

The consultation closes on 26 February 2021. The Government will then have to publish its response to the consultation, setting out any firm proposals for reform before consulting on draft legislation to implement the changes (if any). It will therefore be some months before we have any further details on whether any of these proposals are being taken forward, and a timescale for any changes to take effect.

These articles are from the December 2020 issue of Employment and Immigration Law Update, our monthly newsletter for HR professionals. To download the latest issue, please visit the newsletter section of our website. For further information please contact Liz Stevens or another member of Birketts’ Employment Law Team.