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Government launches another review into restrictive covenants

The government appears to have a bee in its bonnet about restrictive covenants - and non compete clauses in particular. These are the restrictions that prevent employees from competing with their employer for a period after their employment ends.

In 2014, it commissioned a report which recommended that non-compete clauses in contracts of employment should be banned on the basis that they act as a barrier to workers starting up their own businesses - despite the fact that they only act as a barrier if the worker intends to unfairly compete with their former employer. Then, in 2016 it initiated a consultation to identify  'whether there are reasons for believing that non-compete clauses … are stifling innovation, particularly for start up businesses'. That review was abandoned. So quite why the government has decided that now is a good time to revisit this old chestnut, is anyone's guess. But revisit it they have - this time by way of a further consultation on measures to reform post-termination non compete clauses in contracts of employment.  

The government is considering two options: requiring employers to financially compensate any employee who wants to set up a competing business or work for a competitor, or simply banning non compete clauses altogether.

Option 1: mandatory compensation

The idea is that employers will need to financially compensate employees for the duration of their restrictive covenants. So, if business A wants to stop its top sales executive from working for a key rival for six months after their employment ends, it would have to compensate them for that period. 

The government believes that this will 'encourage employers to consider whether the use of a non compete clause is necessary and reasonable' and make them much less likely to impose restrictions for 'an unreasonable length of time as this would incur additional cost'. 

The consultation suggests that compensation should be calculated by reference to a percentage of the employee's average weekly earnings and seeks views about whether this should be set at 60%, 80% ,100% or something else. 

It also wants to 'disincentivise' employers from including non compete clauses in contracts of employment if they don't intend to enforce them. It is considering requiring employers to compensate staff if they remove restrictions at the 'last minute' which they take to mean the duration of the covenant before the employment ends. So, business A would need to tell its sales executive that it didn't intend to enforce the non compete clauses at least six months before their employment ends. That in itself, could incentivise them to abandon any caution and go all out to compete against their employer!

Option 2: ban non compete clauses

The rationale for this option is to 'boost innovation and competition' and make it 'easier for individuals to start new businesses and enable the diffusion of skills and ideas between companies and regions, which can in turn impact economic growth'. Eh? It suggests that businesses will still be able to protect their legitimate business interests by imposing confidentiality clauses and relying on intellectual property law. This ignores the fact that non compete clauses are only enforceable if they are reasonable and are included into contracts precisely because other methods of protection aren't always enough to stop someone from unfairly competing with their former employer.

It's difficult to imagine that many employers will be reassured by the government's breezy references to the booming entrepreneurial economies of California and Isreal which, apparently ban/limit non compete clauses.

Deadline for responses

The consultation ends on 26 February 2021.

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