Last reviewed 4 January 2021

Opeyemi Ogundeji, researcher and employment law writer at Croner-i, details the latest on non-compete and exclusivity clauses.

As an attempt to support the economic recovery in England from the impact of coronavirus by boosting innovation, creating new jobs, and increasing competition, the Department for Business, Energy and Industrial Strategy (BEIS) has launched two consultations. They seek views on, first, options to reform post-termination non-compete clauses in contracts of employment and, second, on extending the ban on exclusivity clauses in contracts of employment.

Post-termination non-compete clauses

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 of time after the employee leaves. To enforce a restrictive covenant of this nature, the clause must be no wider than is reasonably necessary to protect the interest of the company. This means that they must be reasonable when considering the interests of the parties involved and the wider public in general.

The constraint on the employee must not be permanent, but only for as long as is reasonably necessary. The time limit on the clauses requires realistic thought. Tribunal judges usually consider that six months is long enough, though in exceptional circumstances have stretched that to one year. It must also only cover a reasonable geographical limitation. For example, a departing employee starting a business in the UK that is similar to their previous employer’s branch in New Zealand is unlikely to be a real threat. In the next road would be a greater problem.

The purpose of the consultation, which is open for comments until 26 February 2021, is to seek views on the following.

  • Making non-compete clauses enforceable only when the employer provides compensation during the term of the clause — as in countries like Germany, France, and Italy.

  • Requiring employers to disclose the exact terms of the non-compete agreement to the employee in writing before they enter into the employment relationship.

  • Placing a statutory limit on the length of non-compete clauses.

  • Banning non-compete clauses altogether by making them unenforceable — potentially raising the need for other post-termination restrictions to be made tighter.

BEIS also asks whether this could be complemented by additional transparency measures and statutory limits on the length of non-compete clauses and puts forward an alternative proposal to make post-termination, non-compete clauses in contracts of employment unenforceable.

Ban on exclusivity clauses

BEIS has also invited comments on a proposal to extend the ban on exclusivity clauses to contracts where the workers’ guaranteed weekly income is less than the Lower Earnings Limit, currently £120 a week. The intention is to allow low-income workers who are not able to secure the number of hours they would like from their current employer to seek additional work elsewhere. Previously, exclusivity clauses have been banned from zero hour contracts in order to enable workers to seek paid work elsewhere if the company is not in a position to offer this to them.

BEIS notes that, following the impacts of the Covid-19 pandemic, companies are not always in a position to offer enough hours for every worker. If more workers are able to take on additional work, on short hours contracts, this could also increase businesses’ confidence to create jobs with contracts which suit them and their current circumstances.

The responses to this consultation, which is also open for comments until 26 February 2021, will help inform decisions on detailed policy questions such as the appropriate level to set the earnings threshold and the appropriate level of hourly wage cap for which an exemption to the ban may be warranted.

Takeaway

Both these clauses are currently difficult to enforce, mainly because employers need to show that they are a reasonable way of protecting legitimate business interests. Despite the Government’s hope that reforming these clauses will help to reduce litigation, limiting their use further may make them much harder for employers to rely upon and actively creating more competition for employers may just slow their financial recovery from coronavirus. However, it does remain to be seen what the result of these consultations will be and how the Government will ultimately respond to them.