Non-compete clauses in employment contracts reform

The UK government previously in 2016 called for evidence on how non-compete clauses worked in practice. This did not progress in 2016, however, Covid-19 and its effects on the UK economy has prompted the further review of non-compete clauses in practice. The government seeks to enable workers to be able to utilise their skills and expertise to easily find or move employment in order to boost the economy. They recognise the need for innovation so that, in particular, businesses that have suffered can grow quicker and again enhance the UK economy.

They are currently exploring two avenues as part of their consultation. The first is mandatory compensation and the other a ban on non-compete clauses.

Mandatory compensation

The current law on non-compete clauses holds them enforceable so long as they are reasonable in nature, in particular the length of the non-compete period must be reasonable and no longer than necessary. This current law is viewed by many to be too restrictive and allows employers to use them without much thought for the necessity of them in particular circumstances. Often in practice, courts uphold the enforcement of reasonable non-compete clauses up to 12 months in length.

Currently the government is looking into the mandatory compensation element and a limitation on the time period for the non-compete to be in place in line with Germany, France and Italy who currently have these in place as follows:

Country

Mandatory compensation

Limitation

Germany

50% of salary and any other benefits/stock options, as monthly payment

2 years maximum in length

France

25%-60% of total salary, as monthly payment

2 years maximum in length;  limited in the business; and limited in geographic scope

Italy

50% of salary (as defined by parties), on agreed payment terms; higher compensation is more desirable

3 years maximum for a standard employee, 5 years maximum for an executive; and limited in territorial scope

 

The benefits of this approach are that employers have to undertake further consideration whether to include a non-compete clause or not, the government hopes that this approach would act as a deterrent for employers to use this as a standard approach. It is also believed that this approach would lead to less litigation cases as employees are less likely to break their restrictions if they are for a shorter period and they are being compensated during this time. Less litigation leads to less costs overall.

There is the possibility that this approach could lead to further use of gardening leave or other indirect restrictions on employees where employers would essentially find a ‘loophole’ to paying mandatory compensation but still enforcing restrictions on employees. However, even with that being the case it is likely that most employees would still benefit in some form with this option.

A further point for consideration is the implementation of requiring the employer to disclose the details of any non-compete restrictions prior to entering into an employment relationship, failure to do so would render any non-compete clause unenforceable. If used, this would be implemented to increase transparency and communication.

Ban on non-compete clauses

An alternative option is prohibiting the use of post-termination restrictions and non-compete clauses altogether, regardless of their reasonableness.

The benefits to this approach include bolstering innovation within society as competition would increase; businesses would need to ensure they were constantly growing to stay ahead. It would also allow good labour mobility between different organisations. It is thought that the current climate needs this mobility in order to share and diffuse skills across different businesses and regions around the country. A ban would speed up this process as skilled employees would not need to wait for their non-competes to end before moving establishments.

This is an approach currently used in California and Israel. In California there have been pros and cons to this approach, and the benefits gleaned from their reform have meant that employers have to put greater effort into enticing employees to stay; achieved by creating a great working environment and benefits schemes. It has also encouraged more innovation as competition has increased across the state.

One exemption to the non-compete rule in California where there is a sale of a business. In some instances, businesses have tried getting around the ban on non-competes by disguising it as a sale; employees are sometimes required to buy shares in the business then when they leave they must sell the shares back. This disguises the situation as an exemption and therefore allows them to avoid the ban on non-competes.

There is a fear that confidential information would not be protected without enforceable non-compete clauses. It is useful to note that usual intellectual property rights would still be protected regardless of a ban on non-compete clauses. This means that copyright, trademarking and trade secrets/client lists are protected.

Insights

The reform consultation finished on 26 February 2021. The government called for insights on the options above prior to the reform being closed.

Stone King will be reporting further on any developments published on non-compete clauses.

 

The law and practice referred to in this article or webinar has been paraphrased or summarised. It might not be up-to-date with changes in the law and we do not guarantee the accuracy of any information provided at the time of reading. It should not be construed or relied upon as legal advice in relation to a specific set of circumstances.

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