Consultation on the operation of restrictive covenants or non-compete clauses
The Department for Business, Energy & Industrial Strategy (BEIS for short) has given notice that it is seeking views on proposed changes to the operation of post-termination clauses in contracts of employment (more commonly referred to as “restrictive covenants” or “non-compete clauses”).
Restrictive covenants are common place in many contracts of employment. They operate to provide a degree of security and comfort to employers in situations whereby an employee ceases to be employed (whether that is by virtue of the employee giving notice and leaving, or whether the employee has been dismissed by the employer). In brief, the prohibitions that restrictive covenants set out include, for example, restricting a former employee from working for a direct competitor, or to setting up a competing business in a certain geographical area relative to the original employer.
In a consultation paper published on 4 December 2020, the BEIS have stated that the reason for their consultation at this time is to support the economic recovery from the impacts of COVID-19, noting that imposing such restrictions as currently exist on an individual’s ability to work will act to inhibit innovation and competition and ultimately prolong economic recovery from COVID-19 as a result.
While some may agree with the proposition set out by BEIS, there will undoubtedly be an alternative view that appreciates the value and importance of restrictive covenant clauses in their current form. As mentioned, the overriding purpose of such clauses is to protect businesses from situations whereby a former employer can walk out of the door and straight into a competitor’s operation – taking with them all of the trade secrets and confidential information that they possess, be that in their heads or otherwise.
Of course, restrictive covenants cannot operate to prevent someone joining a competitor indefinitely, for the courts would most certainly disregard such a clause, but the operation of a reasonable restrictive covenant will nevertheless provide protection to a business when an important employee leaves. For many years, the courts have recognised the tension and balance between the legitimate business interests of the ex-employer on the one hand, and the freedom to trade and work of the former employee on the other. Typically, but not always, courts will look to give effect to covenants where the restriction is measured and necessary to protect the confidential information in a way that is not otherwise ordinarily achievable with routine protections against the removal and use of confidential information.
The consultation paper makes two distinct proposals or options, with the second option being an alternative, as opposed to an additional option.
Option 1: mandatory compensation
Firstly, BEIS propose that a system of “mandatory compensation” is imposed in relation to the operation of restrictive covenants. Essentially, the proposal is that restrictive covenants would not operate or be enforceable unless there was some form of compensation paid by the ex-employer to the former employee as a result of the former employee having to adhere to the restriction post-termination.
The idea behind this proposal is that by imposing a mandatory compensation of this kind, employers may actually think twice before they go ahead and insist that a former employee is subject to any post-termination restrictions. Additionally, BEIS suggest that having such a compensation system would reduce the frequency in which courts are required to get involved in disputes.
Option one also include a number of “complementary measures” that BEIS are exploring, including things like requiring employers to disclose the exact terms of restrictive covenants to employees when entering the employment relationship, and the imposition of statutory restrictions on the period of restrictive covenants so that they could only be enforced for a certain period of time. Currently, restrictive covenants are a creature of the common law – not statute.
Option 2: Ban on restrictive covenants
The second, and alternative, proposal is that restrictive covenants be made unenforceable. This proposition will likely be met with significant resistance.
BEIS put forward the argument that having a complete ban like this would act to create greater certainty for all parties concerned. They believe that this would have a positive effect on boosting innovation and competition – whilst recognising that there may have to be some exceptions to the general rule (though there is no detail on what those exceptions may be).
Whilst BEIS stipulate that a ban on restrictive covenants would increase labour mobility and benefit both the employee and the overall efficiency of labour markets, it is difficult to envision a scenario whereby this option would be met with anything other than extreme resistance from employers.
When will this move forward?
The consultation, which contains 37 questions, is due to close at 11.45pm on 26 February 2021. Any interested party can enter a response. Harper Macleod LLP acts for many businesses who are innovative and entrepreneurial. The prospect that the creation of business initiatives (and employment opportunities) may be undermined by the introduction of restrictions on covenants will be a matter many business owners and managers will wish to consider carefully.
You can find the consultation paper here
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