US non-compete clause review could influence UK reform

President Biden last month signed an executive order on promoting competition as the US economy recovers from the impact of the coronavirus pandemic. The order, among other matters, encourages the Federal Trade Commission (FTC) to consider developing rules to “curtail the unfair use of non-compete clauses”, along with “other clauses or agreements that may unfairly limit worker mobility”.

The UK government consulted late last year on proposals to reform the law around post-termination non-compete clauses in contracts of employment. Among the potential options for reform explored in its consultation paper were banning the use of such clauses outright along with placing statutory limits on their length and requiring the employer to compensate its former employee during the term of the clause.

The consultation closed in February, and the government is yet to publish its response or provide any update on its timing for doing so.

Aisleen Pugh of Pinsent Masons, the law firm behind Out-Law, said that such clauses were seen by some as “a barrier to ‘entrepreneurial spirit and start-ups, and driving economic recovery”.

“Non-compete covenants are already prohibited in some US states and, in the wake of the global coronavirus pandemic – and, indeed, Brexit in the case of the UK – governments are increasingly focused on ways in which to boost ailing economies including removing anti-competitive practices,” she said.

“Reformation of non-compete covenants has been on the UK government’s agenda for some time and it will be interesting to see the outcome of the consultation on this. Any proposed changes are likely to be the subject of further consultation, so could be some way off. Mandatory compensation and an outright ban are options under consideration – these would be pretty radical steps in the UK, although by no means unprecedented in other jurisdictions such as Germany, France and Italy,” she said.

Biden pledged to ban non-compete and ‘no-poaching’ agreements, other than where “absolutely necessary to protect a narrowly defined category of trade secrets”, during his presidential campaign. According to his ‘plan to empower workers’, 40% of American workers have been subject to non-compete clauses at some point in their careers, limiting their ability to move to a job with a competitor organisation.

Some US states, including California, North Dakota and Oklahoma, already restrict the use of non-compete clauses, particularly their imposition on low-earning workers. However, federal-level action of the type envisaged by Biden’s executive order “would be a drastic change from the current state of play”, according to Boston-based employment expert Bret Cohen of Nelson Mullins. However, any such action would not be immediate, he said.

“The recent executive order does not invalidate current non-compete agreements,” he said. “It is now in the hands of the assigned federal agencies to determine if – and how – they will conduct their review and make recommendations. No federal agency has banned or limited non-competes as of yet.”

Cohen said that there are other measures open to employers needing to protect their legitimate interests, although some of these are more difficult to enforce.

“Employers can still bring other actions in the handful of states that ban non-compete agreements or make it exceedingly difficult to enforce such agreements, such as a misappropriation of trade secrets claim,” he said. “However, without a non-compete, employers are often disadvantaged as a trade secret claim is more expensive and an employee’s misconduct is difficult to uncover, especially as it relates to small businesses.”

“In the absence of a non-compete, employers should consider other provisions such as confidentiality, non-solicitation and non-interference obligations that protect legitimate employer interests. Another possible consideration is incentivising employees to refrain from competing, such as garden leave obligations, during which an individual is not permitted to work for another employer in exchange for payment while on leave,” he said.