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Government consultations: Post-termination non-compete restrictions and exclusivity clauses

11 December 2020

The Government has launched two key employment consultations seeking views on both non-compete restrictions and exclusivity causes.

The consultations:

Non-compete clauses

Non-compete clauses are designed to prevent an employee joining a competitor employer for a defined period after the employment terminates. Such clauses are often difficult to enforce and must be drafted carefully to ensure they are reasonable, protect a legitimate proprietary interest of the employer and are no wider or longer than necessary to enable that protection. If they are too wide or too long they are generally held to be void for being in restraint of trade.

The consultation on non-compete clauses has been launched in a bid to support economic recovery from the impact of COVID-19 by allowing freer movement, unfettered choice for people and businesses and reduced restrictions. This consultation is part of a greater commitment by the Government to ensure that the conditions for new jobs are as open as they can be, that there is increased competition and that innovation is allowed to prosper. The consultation is seeking view on:

Option 1: Mandatory compensation

Compensation - This proposal would make non-compete clauses enforceable only when the employer provides compensation during the term of the clause. The consultation is seeking views on the level of compensation which may be appropriate (between 60% and 100% of average weekly earnings has been outlined in the consultation). The level of compensation should be high enough to create a financial disincentive to their use.

Transparency - Additional transparency measures are also being considered. The Government is seeking views as to whether the exact terms of the non-compete agreement should be disclosed to the employee in writing before they enter into the employment relationship.

Statutory time limit - The Government is considering introducing a maximum limit on the period of non-compete clauses. The consultation seeks views on whether three, six or 12 months post-termination would be the preferred limit.

Option 2: Ban non-compete clauses

The alternative proposal is to make post-termination, non-compete clauses in contracts of employment unenforceable. The scope of any ban would need to be clearly defined and there would need to be consideration of whether there would be any exemptions.

The focus of the consultation is on non-compete clauses. Wider post-termination restrictive covenants such as non-solicitation clauses (used to prevent an employee soliciting employees and customers) and non-dealing clauses (used to prevent a departing employee from having "dealings" with their ex-employer's clients) are not the primary focus of this consultation. Although there is a question asking whether the compensation requirement should be extended to the wider group of restrictive covenants.

The consultation closes on 26 February 2021.

Exclusivity clauses

Exclusivity clauses in contracts of employment prevent workers from taking on additional work with other employers. Since 2015 exclusivity clauses have not been permitted in zero hours contracts.

The purpose behind the consultation on exclusivity clauses is to allow low-income workers who are not able to secure the number of hours they would like from their current employer to seek additional work elsewhere.

The consultation is seeking views on the specific proposal to extend the ban on exclusivity clauses beyond zero hours contracts, to contracts where the workers' guaranteed weekly income is less than the Lower Earnings Limit, currently £120 a week.

The consultation also closes on 26 February 2021.

Comment

With many employers unable to offer their workers sufficient hours it is unsurprising that exclusivity clauses are being revisited. Low earners have in particular been badly impacted by the pandemic.

The non-compete consultation is perhaps more surprising. A Call for Evidence in 2016 found that non-compete clauses were working well and that "restrictive covenants are a valuable and necessary tool for employers to use to protect their business interests and do not unfairly impact on an individual's ability to find other work". However, the impact of the pandemic has led to the Government reconsidering the possibility of reform.

The consultation on non-compete clauses may be of particular concern to many employers.  2020 has been an incredibly challenging year and protecting businesses is a top priority. A key message for employers is to revisit their employment contracts and consider what protection is currently available. Whilst we await the outcome of the consultation, employers should ensure confidentiality and intellectual property clauses and notice period and garden leave provisions are drafted robustly and provide sufficient protection for the business.

If you need any assistance with the issues raised in this update, please do not hesitate to contact a member of the UK employment team.

Further Reading