UK Government Looks to Reform Non-Compete Clauses

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• UK Government Looks to Reform Non-Compete Clauses

20 January 2021

In a consultation which closes in February this year, ministers are seeking views on non-compete clauses in employment contracts, in order to encourage more entrepreneurship.

Looking to California’s Silicon Valley as inspiration, where state law makes non-compete clauses unenforceable, this free movement of workers is given as a common reason for the growth of the technology industry in the state.

Non-compete clauses are used in contracts of employment to restrict an individual’s ability to work for a competing business or to establish a competing business for a defined period after they leave.

In order to encourage more UK start-up businesses, and to support economic growth post-COVID, the government is exploring avenues to make non-compete clauses enforceable only when the employer provides compensation during the term of the clause.

They are also considering an alternative proposal where non-compete clauses in contracts of employment are unenforceable, as in California.

“To support our economic bounce back, the government is exploring avenues to unleash innovation, create the conditions for new jobs and increase competition. We want to maximise opportunities for individuals to start new businesses, find new work and apply their skills to drive the economic recovery. For these reasons we are seeking views on reforms to noncompete clauses.”

–Statement from the government’s consultation description

What is the Alternative? 

Charles Urquhart from Law firm Clyde & Co LLP, in a piece by legal insights pubisher Lexology, described the two main options that government are seeking views on.

One solution would require an employer to pay an employee during such a clause, which may encourage less of their use of in contracts. Similarly, it might discourage employed from breaching obligations.

According to Urquhart: 

“The government is also asking for views on what level of compensation employers should have to pay if it goes ahead with this proposal. It suggests that this should be a level of compensation that is set as a percentage of the ex-employee's average weekly earnings prior to termination for the duration of the non-compete clause, e.g. 60 per cent, 80 per cent, 100 per cent or some other percentage.

“It is also asking whether the requirement to pay compensation during the period when the employee is restricted should be limited to non-compete clauses or should also apply to other types of post-termination restrictions, such as non-solicitation and non-dealing clauses.”

Another solution would be banning the clauses outright, making it easier for start-up businesses to form.

The government, however, recognises the need to “help protect legitimate business interests and prevent harm to a business”. The consultation document confirms that they are not seeking views on confidentiality clauses, intellectual property law or other means to protect legitimate business interests.  

This consultation closes at 11:45pm on 26 February 2021

Picture: a picture of a person signing a paper contract

Article written by Ella Tansley | Published 20 January 2021

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