Covid-19 has had an impact on many different aspects of our everyday lives, but there is one area that has been particularly hard-hit and that is the labour market. Thus in a bid to support the economic recovery following the impact of the pandemic, the Government has turned its attention to looking at ways to create better conditions for those seeking alternative employment or looking to pursue entrepreneurial ventures. This has led to the Department for Business, Energy and Industrial Strategy issuing a consultation paper on measures to reform post-termination restrictive covenants in employment contracts.
The paper states that the Government is “particularly interested in views on an option to make post-termination, non-compete clauses in contracts of employment enforceable only when the employer provides compensation during the term of the clause”. This is more akin to the position in the U.S and would mean that unless the employer agreed to remunerate the employee for the time during which the non-compete restriction is applicable and the employee is effectively kept out of the market, the non-compete clause would be unenforceable and the employee would be free to pursue work in their current sector with competitors of their former employer or to set up in competition with their former employer following the termination of their employment, ultimately helping to boost the country’s economic recovery.
The Government is also exploring the option to introduce statutory restrictions on the period of non-compete clauses in employment contracts, which at present should be reasonable and no longer than necessary to protect the employer’s legitimate business interests. In well drafted employment contracts, the period of the non-compete restriction is usually shorter than for other post-termination restrictions relating to clients, customers, and staff. If adopted, this would provide a more consistent, uniform approach nationwide to the length of non-compete clauses, which are the most draconian form of post-termination restriction and the hardest to enforce, because most employers’ legitimate business interests such as confidentiality, client connections and stability of their workforce are adequately protected by post-termination confidentiality obligations, non-solicitation, non-dealing with clients, non-poaching and non-employment of employees’ post -termination restrictions.
The Government is seeking views on the implementation of transparent measures and communication between employers and employees in conjunction with remuneration. For example, employers would be required to disclose the exact terms of the non-compete post-termination restriction to employees in writing before they accept an offer of employment and enter employment relationships. This would mean that employees could make informed decisions about their ability to start their own business or join a competitor after their employment terminates, prior to commencing their employment.
Alternatively, the Government is also seeking opinions on whether non-compete post-termination restrictions in employment contracts should be rendered completely unenforceable. This would give employees even greater flexibility to pursue alternative employment immediately after their previous employment ended using their current skill set and could increase labour mobility and help the general economic recovery post-Covid. However, a complete ban on non-compete clauses is unlikely to be well received by employers because employers who have invested time and money in training their employees will not be given protection against their employees leaving the business as soon as they have completed their training and using their skills elsewhere in direct competition with their former employer.
The closing date for this consultation is 26 February 2021 and it will be interesting to see what subsequently unfolds. Our prediction is that in the current economic climate, employers are unlikely to be ordered to pay remuneration for the period of non-compete post-termination restrictions. As non-compete restrictions are difficult to enforce anyway, they are unlikely to be banned and employers will be keen to retain them, even if only for deterrent effect. However, it may well be the case that a statutory limit on the period for which post-termination non-compete clauses can be in place is introduced, particularly as employers should have well-drafted post-termination confidentiality obligations and other post-termination restrictions aimed at protecting their client connections and the stability of their workforce, hence rendering the importance or even need for post-termination non-compete clauses less significant.
In the meantime, and in any event, non-compete post-termination restrictions should be carefully drafted and tailored to the circumstances of the business and seniority level of employee concerned. They should be reviewed at regular intervals of the employment cycle. One size will not fit all, and may need to be amended with the employee’s written consent to take account of changing circumstances such as promotions and business needs.
Non-compete restrictions should only prevent an employee from competing in an area of the business in which they were directly involved or for which they had supervisory responsibility for a limited defined period prior to their termination date, rather than the U.S approach of listing competitors’ names whom an employee cannot join in any capacity in any event, even in a non-competing area of the organisation or in an area of the business in which they were not previously involved. The U.S approach would not be enforceable in the U.K. However, having said that many U.S businesses choose not to have any non-compete or even any post-termination restrictions at all in their employment contracts.
It’s worth bearing in mind that in the U.K, all restrictive covenants are void as a matter of public policy because they are in restraint of trade, unless they exist to protect the legitimate business interests of the employer and are no wider than is reasonably necessary to do so.
