Charlotte Farrell | 27th July 2021

Non-compete clauses – Are they still appropriate?


Charlotte Farrell | 27th July 2021

Non-compete clauses – Are they still appropriate?

The Government is reviewing whether non-compete clauses remain appropriate in the new post Brexit and post COVID-19 era. In my article in December last 2020, “Protecting your business – how restrictive covenants can help ”, I looked at the ways in which restrictive covenants can be used to protect businesses and the issues to consider when drafting them and enforcing them. The government has also been looking at restrictive covenants, but from a very different perspective.

Is there reform ahead for restrictive covenants and in particular non-compete clauses?

In early December 2020 , the Financial Times printed an article titled “UK aims to nurture starts ups by curbing non-compete clauses” and on 4 December 2020 the Government launched a consultation with the catchy title “Measures to reform post termination non-compete clauses in contracts of employment”. The consultation closed on 26 February 2021 and puts restrictive covenants firmly in the spot light.

This article looks at the reasons for this consultation and review, the controversy surrounding restrictive covenants any how Brexit and COVID-19 may be partly responsible for changes to restrictive covenants in 2021 and beyond.

What is a restrictive covenant?

A restrictive covenant essentially restricts the action an employee can take when they leave their employment. They can cover any type of activity but the most common are non-solicit, non-deal, non-poach and non-compete clauses. These can apply to clients, customers, suppliers, employees or any other category of person that does business with a company.

When drafting a restrictive covenant, a company should look at who it does business with, what confidential information or trade secrets it has and how that business could be harmed if a key employee left and used that confidential information or trade secret. Any restrictions should then be specifically tailored to that risk and should go no further than is necessary to protect it.

Why are non-compete clauses so controversial?

Non-compete clauses have been controversial for several years. They can stop a person from working and earning a living. Depending on their industry, they could also prevent them from using skills which need to be regularly exercised to stay up to date and relevant.

Normally when the legal profession refer to “non-compete” clauses we are referring to specific clauses that stop people working for a competitor or setting up a separate business in competition, for a specific period of time and normally within a certain geographical area. These are the clauses that can potentially completely stop people working in their chosen industry.

Other restrictions, i.e. non-poach, non-deal and non-solicit are normally considered separately and seen as much more reasonable restrictions, especially when they are tailored to the people, businesses and information the employee themselves had contact with or knowledge of. The tighter the drafting the better.

The reason non-complete clauses are seen as so controversial is that it is generally accepted that non-poach, non-deal and non-solicit clauses will often offer enough protection to a business when someone leaves. Unless there are particular circumstances to justify a tighter restriction, non-compete clauses may go further than is necessary to protected legitimate business interests and can start to look like a punishment or deterrent to someone leaving a company.

Non-compete clauses are often included in a contract of employment along with the other restrictions as a standard clause. However, commercially employers often accept that if pushed they may not be enforceable. They are often included as a deterrent with employers not actually intending on enforcing them if breached, but instead hoping employees will abide by them due to the fear of any repercussions if they did breach them.

The Government’s consultation

In early December 2020, just before the Brexit transition period ended, the Government launched its consultation into non-compete clauses in contracts of employment. The consultation web page sets out two very specific issues the Government is seeking views on:

  • “Proposals to make non-compete clauses enforceable only when the employer provides compensation during the term of the clause, and whether this could be complemented by additional transparency measures and statutory limits on the length of non-compete clauses”.
  • “An alternative proposal to make post-termination, non-compete clauses in contracts of employment unenforceable”.

Why has the focus turned to restrictive covenants now?

The Government’s consultation states “to support economic recovery from the impacts of COVID-19, the Government is exploring avenues to boost innovation, create the conditions for new jobs and increase competition”; i.e. COVID-19 has caused a lot of redundancies and job losses and the Government would like people to set up their own businesses or move to companies that are currently in a position to recruit, without the barrier of post termination restrictions.

The Government had previously looked at the issue of restrictive covenants in 2016 but did not take it any further at that time. COVID-19 has brought it back to the focus once more.

The Government also appear to be taking note of the recent surge in start up companies and the technology sector in the US, in particular Silicon Valley in California, where non-compete restrictions are illegal and the entrepreneurial culture has exploded. They appear to hope that taking similar action in the UK may have a similar effect.

The discussions haven’t just been fuelled by COVID-19 though. An article in the Financial Times also looks at Brexit and the role it has played in this review. It can be no coincidence that many of the existing start-ups in London have been set up by entrepreneurs who have moved from the EU to the UK. As of 1 January 2021, this was no longer such an easy option for those entrepreneurs not already here and the Government is therefore looking at how to encourage and develop the entrepreneurial culture amongst those already in the UK.

The details of the consultation

Consultation point 1 – keep the non-compete clause but limit its scope and compensate employees for them

The first of these points looks at keeping a non-compete clause but putting restrictions on it. It focuses on whether companies should have to pay employees for the period of a non-compete clause. For example – a company can choose to include a 6 month non-compete clause in the contract but must then pay the ex-employee a certain amount, or put them on garden leave, for that period. Under this arrangement, the company would gain time to protect its clients and business and the employee should not be left unable to pay their living expenses.

It would not prevent companies from using non-compete clauses but it would make them think twice about whether they were truly necessary as there would be a cost involved. Employers are only likely to use such covenants for employees that really need them and employees are more likely to abide by their restrictions as they will be compensated financially for the period they apply for.

This point also looks at whether there should be a fixed time limit for non-compete clauses. Currently the courts are only likely to enforce restrictions up to 12 months long, and even then, only for senior employees who could cause serious damage. Restrictions of 3-6 months are seen as much more reasonable for most employees. More formal guidance on the length of a reasonable restriction would certainly make it easier for businesses and avoid the frequent uncertainty over whether a particular length of restriction may be enforceable or not.

Consultation point 2 – ban non-compete clauses

The second of these points goes further and looks at whether no compete clauses should be prohibited altogether and deemed unenforceable.

There is no doubt that this would be good news for employees and could certainly increase innovation with people moving between competing companies or setting up in business on their own without the threat of legal action from ex-employers. We have seen a lot more of this in recent months in any event, with ex-employees relying on non-compete clauses not being enforceable and risking breaching them to start their own business journey. If the Government did ban non-compete clauses this would be a much easier thing to do for those entrepreneurs.

However, it would be bad news for those businesses which rely heavily on non-compete restrictions to give them time to protect their business and deals for a short period of time before key employees are back in the market place.

It may not be such bad news for all businesses though. As long as other restrictions remain possible, these along with intellectual property clauses and general confidentiality clauses should continue to give most businesses a great deal of protection and it would at least remove the uncertainty over whether or not to include a non-compete clause and, if included, how long to make it for.

The risk for wider restrictive covenants

One point we are keeping a close eye on is what the government are defining as a “non compete” clause. As mentioned above, lawyers traditionally view this as narrowly as covering working for competitors or setting up in competition. It generally excludes non-poach, non-deal and non-solicit clauses as they look at very different things and don’t prevent someone from working.

Whilst the main text of the consultation focuses on these narrow non-compete restrictions, the Government has included a question in its consultation asking whether or not these changes should be limited to the narrow non-compete clauses or be extended to apply to all restrictions, including the non-poach, non-deal and non-solicit clauses.

Placing any significant restrictions on these wider restrictions, and particularly banning them all together, could have disastrous consequences for businesses which rely on personal relationships with clients and customers. Arguably businesses rely on these clauses much more than a non-compete clause when someone leaves as they protect the key confidential information much better and are easier to enforce. Placing significant restrictions on these types of clauses could have a much bigger impact on existing businesses than the purpose of the consultation suggested.

Awaiting the results with interest

The consultation closed in February 2021 and the web page for the consultation still says the Government is considering the responses. There does not appear to be a fixed date for them to publish the results. Whenever they are made public, it will be interesting to see the results and how the Government chooses to act in this area.

If you have any questions or queries about this consultation or restrictive covenants more generally please don’t hesitate to contact any member of the Employment team who would be happy to help.

This blog was originally written in January 2021 and has periodically been updated with new information.