Government Consultation announced on reform to non-compete clauses in employment contracts

On 4 December 2020, the Government announced a consultation on measures to reform post-termination non-compete clauses in contracts of employment. The consultation comes as part of the Government’s drive to support the economy following the impact of COVID-19. Non-compete clauses place restrictions on individuals following the end of their employment, such as to prevent them from working for competing businesses or establishing competing businesses, and the Government is seeking to remove such barriers to maximise opportunities for individuals to find new work, form their own businesses and “apply their skills to drive the economic recovery”.

Further information on the consultation, including on how to feed into this, can be found here. The consultation closes on 26 February 2021.

The purpose of the consultation

In 2016, the Government published a Call for Evidence to better understand how non-compete clauses are used and why. Although no actions were taken forward at the time, the Government have confirmed that the impact of COVID-19 on the labour market has led them to consider measures to “create the conditions for new jobs and increase competition”.

The consultation is considering two things:

1. Amending the law to make post termination non-compete clauses enforceable only when the employer provides compensation during the term of the clause.
2. Banning post termination non-compete clauses completely.

With regards to the first option, the Government’s intention is to encourage employers to consider whether the inclusion of a non-compete clause is necessary and reasonable for that particular role before inserting it into the contract. This measure has already been implemented in countries such as Germany, France and Italy and the Government has proposed further measures to complement this proposal. These include an option to enhance transparency and to place a statutory limit on the length of such clauses.

The reasoning behind the second proposal includes providing greater certainty for all parties as well as to enable ‘the diffusion of skills and ideas between companies and regions, which can in turn impact economic growth’. The examples of California and Israel are highlighted who have already implemented this practice.

Implications for employers

If measures were implemented as a result of the consultation, the reforms would affect businesses and organisations who use non-compete clauses in their contracts of employment as well as employees who are subject to such clauses and seeking new employment. The consultation report contains a reminder that the Government is not seeking views on confidentiality clauses, intellectual property law or other means to protect legitimate business interests, so employers do need to be concerned about the impact on such clauses which may be essential for their organisation.

It seems unlikely that option two would be introduced as to do so would represent a complete overhaul to this area in an already uncertain time and it is also unlikely that the organisations that feed into the consultation will support this option. We would however urge employers to keep up to date with any developments in this area and remain mindful of any potential changes as a result of the consultation.