Government consults on non-compete clauses

On 4 December 2020, the government launched a consultation into non-compete clauses in employment contracts, which employers often use to prevent employees from working for or establishing a competing business following the termination of their contract. This clause is a type of post-termination restriction (PTR) or ‘restrictive covenant’, and is currently governed by English common law – i.e. developed in the courts on a case-by-case basis.

The COVID-19 pandemic, however, has had “a profound impact on the labour market”; as a result, the government is now looking to restrict the use of non-compete clauses in order to boost innovation and competition in the English jobs market. 

Options under consideration

The consultation details two main options that the government is currently considering.

Option 1: Mandatory Compensation

The first option is to allow employers to use non-compete clauses in contracts only if they offer compensation for the period during which the clause is in force. The reasoning behind this option is that it would disincentivise employers from using these types of clauses due to the financial loss they would incur, or at the very least ensure they think very carefully about whether it is strictly necessary. It would also discourage employers from misusing non-compete clauses, i.e. enforcing them for an unreasonable time period, or where it isn’t necessary.

This option means that businesses can still use non-compete clauses as a legitimate means of protecting their interests; however, the ex-employee will have the security of knowing that they will be compensated.

The government also suggests certain complementary measures, namely to enhance transparency in the use of non-compete clauses and to place statutory limits on their length. For example, employers could be required to disclose to the employee the exact terms of any non-compete clause in writing before the employment relationship starts.

Option 2: Ban Non-Compete Clauses

Alternatively, non-compete clauses could be banned altogether in order to boost innovation and competition in the labour market. It would, the government argues, provide greater certainty for all parties and would have a positive effect on innovation and competition, making it easier for ex-employees to set up new businesses and facilitate the easy transfer of skills and experiences between companies. The consultation document cites the example of California, in the USA, where non-compete clauses are completely void.

Equally, however, the document does acknowledge arguments against this option, e.g. that non-compete clauses can genuinely prevent damage to businesses, for example through the loss of important confidential information.

What does the consultation ask?

After outlining the above options, the consultation opens the floor to respondents, with questions including (but not limited to):

• Do you think the Government should only consider requiring compensation for non-compete clauses, or do you think [it] should consider requiring compensation where other restrictive covenants are used?
• Do you foresee any unintended consequences of limiting the scope of reform to non-compete clauses?
• Do you agree with the approach to apply the requirement for compensation to contracts of employment?

It also asks certain questions specifically of employers, in order to gauge what effect new measures could have, including:

• If mandatory compensation were introduced, do you think you would increase your use of other ‘restrictive covenants’?
• Do you think employees would be more likely to comply with the terms of a non-compete clause if mandatory compensation was introduced?

What next?

The consultation questions are currently available to answer online via a survey on the government website, with entrepreneurs, businesses, employees, employment lawyers and the general public all encouraged to submit their views. The consultation is set to close on 26 February 2021, after which the responses received will be examined and policy decisions will be set out.