Out-Law / Your Daily Need-To-Know

A ban of non-compete clauses ‘highly unlikely’

Out-Law News | 10 Dec 2020 | 10:34 am |

Ed Goodwyn tells HRNews that mandatory compensation may be the price for using non-compete clauses
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  • Transcript

    Are post-termination non-compete clauses in employment contracts going to be banned? A big question and one that will soon be considered by the government after it issued a consultation paper last week. A reminder - these are clauses 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. Why is this consultation happening? The government says it is exploring ways to boost innovation, create the conditions for new jobs and increase competition to support recovery from the impact of Covid-19. The FT was first to report that this was going to happen although in their view the government isn't planning on banning these clauses completely, rather looking at whether they are well targeted and reasonable. Paul Goulding QC, a leading employment barrister, is quoted saying  he was surprised to see this resurface after the government abandoned a similar proposal a couple of years ago. He says the common law has developed in this area for over a century and is generally acknowledged to work well, so no need for radical legislation. So what's our view on this development? On the line, Ed Goodwyn. I put it to him that this was looked at a couple of years ago and it remains very contentious:

    Ed Goodwyn: “It is very contentious and it's interesting that the closing date is also quite quick, it's 26th of February next year for comments on changing the non-compete clause. It is important to remember that it is just the non-compete clause that's being looked at, so not the other restrictive covenants that one often sees in employment contracts. So it's just the non compete stopping an employee leaving one business and going to work for a competitor for a period of time, that's the issue that's been looked at, and only that, and as you say, this was looked at a couple years ago, also, under the previous government, previous to that government, and effectively it was rejected mainly on the basis that this is an issue where the courts have been looking at it for the best part of over 100 years and as a result there's a large body of case law, or what lawyers call 'common law' that sets out fairly agreed rules. The difficulty, I think, for the government, though, is that the rules still allow employers to stop an employee going to work for a competitor in certain circumstances and really what this paper seems to be wanting to do is loosen the shackles of that, of if you like, opening up competition and allowing that employee potentially to go work for the competitor, either entirely or the covenant would only be allowable if, for example, the employer pays some form of compensation to the employee to keep him or her out of the market from working for that competitor."

    Joe Glavina: "Yes, the consultation mentions that, Ed. So it talks about 'mandatory compensation' for the period of the non-compete clause"

    Ed Goodwyn: "Again, very interesting, and something that you we've seen creeping into some covenants that I've already seen in the UK, where employers already volunteering to do that. Now, bearing in mind that most covenants also sit alongside what's called garden leave provisions, which allow an employer once an employee is given notice to put that employee in the garden, but in doing so, the employer has to pay everything under the contract. So it's kind of an extension of that. It's also interesting to reflect that this is the principle which is applied to many of the other jurisdictions in Europe. In Germany, for example, you can't enforce a covenant like this without paying the employee. The question, I suppose is, is that the right way forward and, if so, how much should you be paying? Should it be all the salary, half the salary? What about bonuses and things like that? So it's not quite as straightforward as it might seem and if it is just a small amount of money, it could that be open to abuse and get round what the government is seeking to do? In America, I think in California, there's a complete ban on these clauses, and they've done so on a policy ground, particularly to allow competition in the tech sector."

    Joe Glavina: "That's interesting because the FT says the UK government is thinking along similar lines, although Paul Goulding is quoted saying the common law has developed in this area for over a century and is generally acknowledged to work well. So the big question - will it happen over here?"

    Ed Goodwyn: "Ha, crystal ball gazing. Paul is absolutely right. 100 years, some fairly settled law, although I would also suggest, and I'm sure Paul will agree, that it's not so settled but it doesn't stop disputes arising. Us employment lawyers are often involved in threats of injunction and threats of litigation and these things are still sufficiently uncertain that it does trigger still quite a lot of litigation. So whilst there are lots of rules, there's still quite a lot of ambiguity around those rules which must frustrates both the employer seeking to enforce the covenant and the employee at the sharp end of it. Whether or not this will go through, it's a very considerable policy decision for the government. I think it'll have to recognise, however, that it's not just for the upside of what the government is suggesting because there is downside in the sense that employers often use these covenants as a way of keeping their employees and therefore their legitimate business interest in the investment they have given to those employees from leaving willy nilly and joining the competition. It's also tied into the ability for that employer to protect its confidential information. So I think for large employers, when one's looking at particularly senior employees, or employees who are involved in the technical side of issues where issues of competition are really at the sharp end, this will be a big, big concern to them and I'm sure there'll be considerable lobbying from those employers to retain that which we've got."

    If you have views on this you can have your say. The consultation paper has been published by the government. As consultations go, this is a quick one. It closes on 26 February next year.