Government Starts Consultation on Restrictive Covenants

By December 16, 2020February 18th, 2021Employment, For Business, Latest

The Department for Business, Energy and Industrial Strategy has issued a consultation paper on measures to reform post-termination restrictive covenants, particularly non-compete clauses in contracts of employment.

What are post-termination restrictions?

Post-termination restrictions are clauses often contained in a contract of employment to restrict outgoing employees. There are various types of restrictions such as a non-solicitation covenant, which prevents an outgoing employee from taking their ex-employer’s clients, a non-poaching covenant which prevents an outgoing employee from poaching fellow employees, or a non-dealing covenant which prevents an outgoing employee from having “dealings” with their ex-employer’s clients.

A non-compete clause is another type of restrictive covenant which restricts an outgoing employee’s ability to work for a competing business, or to establish a competing business for a prescribed period of time after their employment has terminated.

Post-termination restrictions are difficult to enforce and must be properly defined in order to be deemed to be reasonable. Restrictive covenants which go further than reasonably necessary to protect the company’s legitimate business interests, for example by being too wide or for too long a period of time, will usually be void as a matter of public policy.

What is the purpose of the consultation?

The consultation considers whether the law should be altered so that non-compete clauses are only enforceable where the employer continues to pay remuneration during the restricted period. The consultation seeks views on the level of compensation which may be appropriate, between 60% and 100% of average weekly earnings has been suggested. It is noted that the level of compensation should be high enough to create a financial disincentive to their use.

The consultation also seeks views as to whether the exact terms of the non-compete clause should be disclosed to the employee in writing before they enter into employment with the employer.

The consultation also considers whether a maximum limit on the period of non-compete clauses should be imposed, for example, three, six or 12 months post-termination.

Finally, the consultation considers whether non-compete clauses should be banned completely.

In our view, requiring employers to pay some amount of remuneration is a sensible idea in principle as it may increase the likelihood of the restrictive covenants being deemed to be enforceable by a Tribunal, subsequently increasing the chance of injunctive relief being granted.

With regards to the suggestion that non-compete clauses be banned completely, this seems unlikely. At this stage it is difficult to imagine that many large organisations would press for this in the response to the consultation.

What about other types of post termination restrictive covenants?

The consultation is primarily concerned with non-compete clauses rather than wider post-termination restrictive covenants. However, the consultation does question whether the compensation requirement should be extended to the wider group of restrictive covenants.

The consultation will close on 26th February 2021.

Charles Hughes

Author Charles Hughes

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