On 24 April 2016, the Government announced that it would investigate to what extent post termination restrictive covenants stifle innovation and entrepreneurship, following The Social Market Foundation (a think tank) recommending a ban. This was partly based on research in the US that limiting the use and enforcement of such clauses had a positive impact on growth and innovation.
The law
The legal position is that any contractual term restricting an employee’s activities after employment is an unlawful restraint of trade and contrary to public policy, unless an employer can show that:
- it has a legitimate proprietary interest to protect (e.g., trade connections, employees, goodwill); and
- the protection sought is no wider than necessary.
A non-competition clause (‘non-compete’), which prevents an employee from joining a competitor organisation is generally harder to enforce. If an employer can adequately protect its legitimate proprietary interest using confidentiality, and non-solicitation and non-dealing clauses, a non-compete clause is unlikely to be enforceable.
However, the courts have recognised that these other forms of protection are not always effective in safeguarding an employer’s legitimate interests. A non-compete clause could be enforceable if without it there would be insufficient protection to confidential information, or where an employee’s influence over customers is so great a non-compete clause is the only effective protection.
Consultation background
The common view across most responses to the consultation at the time was that restrictive covenants were valuable and necessary in enabling employers to protect their interests and that restrictive covenants did not unfairly impact on an employee’s ability to find other work. The Government therefore decided to take no further action.
However, since the economic impact of COVID-19, the Government has reconsidered ways of boosting innovation and on 4 December 2020 it launched a new consultation on reforming restrictive covenants. The consultation sought views on two main options:
- paying an employee compensation for any restrictive covenants; or
- banning them altogether.
Government response
On 12 May 2023, the Government published its response.
The largest proportion of formal responses to the consultation came from individuals (34%).
In essence, the Government has decided not to legislate so that post termination restrictions are only enforceable when an employer pays the employee compensation, nor has it decided to ban them altogether.
However, it is of the view that there is a case for positive intervention as “there are very few constraints on [their] use … in employment contracts”. The Government’s research shows that some restrictive covenants are used by employers as a deterrent, although in its view are unlikely to be enforceable.
The Government will publish guidance on their use to enhance transparency and raise awareness.
What could be worrying news to some employers is that the Government plans to introduce a statutory limit of three months on non-compete clauses. It believes that in doing so, it will boost labour market flexibility and reduce barriers to recruitment. The three-month cap will not apply to other common forms of restrictive covenants, like non-solicitation, non-dealing and non-poaching.
Further, the cap will only apply to employment and worker contracts and not wider workplace contracts, e.g., partnership or shareholder agreements.
Where a non-compete clause does not exceed the three-months, the usual rules on enforceability (as outlined above) will continue to apply.
The cap will be introduced “when Parliamentary time allows”. Whether the Government pushes this forward before the general election remains to be seen.
Comment
Whilst a cap is less draconian than a complete ban, it is a surprising decision. Generally, an employer and/or employee will seek legal advice on the enforceability of restrictions, if not before the employment contract is entered into, on or after termination of employment and, where appropriate, an employee could find ways around the non-compete.
Non-compete clauses of 12-month and 6-month durations are capable, in some circumstances, of being enforced and have been upheld by the courts. Therefore, a three-month limit will leave some employers with inadequate protection, particularly for very senior employees.
If the cap becomes law, it might prove to have the opposite effect of what it is seeking to achieve. Inevitably, employers will find ways around this, whether through longer notice periods and increased use of garden leave provisions, or introducing the restrictions through shareholder agreements (where the opportunity allows). The result might be that the employee finds themselves even more restricted. The Government recognises that the economic success of the policy is uncertain.
The devil will be in the detail. We do not know how the cap will work, e.g., whether it will affect pre-existing contractual restrictions and whether it will apply to settlement agreements, which have not been mentioned at all in the consultation response.
