Mandatory pay or outright ban the options for non-compete clauses

Will post-termination non compete clauses be banned by the UK government? If not banned, have to pay a price for using them? Could developments in the US play a part? 

The UK government has been consulting on this you may remember – that consultation closed in February and we are currently awaiting their response. The government is looking into this because , they say, these contractual devices used by employers hinder innovation and discourage the sharing of ideas which is the last thing the country needs as we try to recover from the pandemic. They want to promote the right conditions for new jobs and increase competition. As the government sees it, non compete clauses do the opposite of that.

A reminder, non compete clauses are restrictive covenants in contracts of employment designed to protect employers, to restrict employees from joining a competing business for a specific period of time following termination of their employment. Given they are a restraint of trade the courts have tended to adopt a strict approach when it comes to their enforcement. So, the courts say the clauses must no more than is necessary to protect the legitimate business interests of the employer and it is for the employer to establish that they pass that test, to show the restriction is justified in the circumstances, not too wide or ambiguous. 

The government is considering two possibilities. The first is to make non-compete clauses enforceable only when the employer provides compensation during the term of the clause, and they are looking at whether this could be complemented by additional transparency measures and statutory limits on the length of non-compete clauses. Alternatively, the nuclear option, to effectively ban them by making them unenforceable.

Interestingly, there have been developments in the US which may influence the UK government and it’s something Diane Nicol has flagged in her article for Outlaw: ‘US non-compete clause review could influence UK reform’. She points out that President Biden has already signed an executive order on promoting competition as the US economy recovers from the impact of the pandemic. The order encourages the Federal Trade Commission to consider developing rules to ‘curtail the unfair use of non-compete clauses’. Diane says non compete clauses are already banned in some US states and in the wake of the pandemic, and, indeed, Brexit in the case of the UK, governments are increasingly focused on ways to boost ailing economies including removing anti-competitive practices.’ She says mandatory compensation and an outright ban are the options under consideration in the UK, which would be pretty radical, although by no means unprecedented in other jurisdictions such as Germany, France and Italy.

So let’s get some further thoughts on this. Ed Goodwyn joined me by phone from the London office to discuss what the UK government might do in light of what is happening elsewhere, and how employers may be affected: 

Ed Goodwyn: “Yes, it's quite a hot topic in relation to non-competes both here in the UK and in the US and, and even though I'm commenting from a UK perspective, it's always interesting to see what other jurisdictions are doing because it might catch the eye of the UK government. So at the moment non competes have been covered by what we call common law which is where the rules have been broadly set in the cases over the years against general principles. However, the UK government decided that it wanted to consult on this around Christmas and the consultation closed in February. They asked for contributions on their consultation as to whether it was considered that the UK law needs to be changed whereby there were more restraints on the use of non competes in the employment context and the commercial rationale from the government is that it was considered that non competes were being overused and they were acting as a brake on the UK economy, particularly in the tech sector, and they thought it was stopping healthy competition, and that's currently with the government and they are thinking about it. So it was interesting for us to see two things in this context. Firstly, this issue, as I mentioned, has been debated in the US and recently some states have gone the way the UK government seems to be thinking, i.e. to restrict the use of non competes, either to ban them outright or to adopt more of a continental European model where non competes could only be enforced, frankly, if the employer effectively pays for it. We’ve also now seen a case from the Supreme Court here in the UK that, arguably, goes slightly the other way. It wasn't an employment case, it was a commercial agreement between two law firms, but within it was a non compete covenant which was for 6 years. Now six years is a remarkable length of time, in the normal context, certainly in the employment context in the UK you won't get a covenant for more than 12 months. In the commercial context in the UK you get much longer periods than that but they still are judged on what is reasonable to protect the legitimate business interest and 6 years is really out there, on the outer limits, nonetheless, in this case the Supreme Court was prepared to uphold a 6 year non compete. Now, that's interesting so far as it goes, but the real interest is whether that sort of case will be considered by the government in its consultation period as another example of why they need to legislate on this to restrain the use of non competes, particularly in the employment context.”

Joe Glavina: “One of the options being considered by the government is mandatory compensation to be paid by employers who want to use non compete clauses. Is that likely?”

Ed Goodwyn: “I think that's quite likely. It's it would be aligned to, as I've mentioned already, quite a few other jurisdictions’ approaches. Arguably, it's more reasonable in the sense that if an employer really needs that protection for its legitimate business interest, well, it ought to pay and, equally, the employee who's at the other end of it won't become destitute, will still have an income whilst effectively they're sitting on their hands waiting for the non compete period to end. It could equally be that the government takes a view that we're not going to make any changes. There are a lot of lawyers out there saying ‘why change that which isn't broken’ and there is an argument that the current case law takes into account the balance between the need for business to protect its interests, and not going to force us to become anti competitive. But I think the government perhaps will use this as an opportunity to change, yes.”

A reminder. The government’s consultation is called ‘Measures to reform post-termination non-compete clauses in contracts of employment’. It closed on 26 February and we are still awaiting the government’s response. As soon as that is published we will return to this important topic and, doubtless, hear from Ed again.

Ed also mentioned a case where the Supreme Court upheld a 6 year non-compete clause in a commercial agreement between two law firms. That ruling was handed down in July and is called Harcus Sinclair. We have put a link to it in the transcript of this programme. 

LINKS
- Link to case report: Harcus Sinclair LLP v Your Lawyers Ltd 
- Link to government consultation: ‘Measures to reform post-termination non-compete clauses in contracts of employment’