Encouraging Entrepreneurship? | Fieldfisher
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Encouraging Entrepreneurship?


United Kingdom

The UK Government has issued a consultation paper seeking views on the reform of post termination non-compete clauses.  It proposes 2 broad approaches to modernise the use of such covenants to counter what it sees as the stifling effect on competition and innovation caused by these types of contractual provision. The consultation applies to Great Britain, so England, Scotland and Wales and not to Northern Ireland.
The 2 broad approaches are:
i) compensate an employee who is subject to a period of restraint; or
ii) introduce of an outright ban.
At first blush this looks like a wholesale assault on protection afforded to legitimate business interests of employer, but fortunately it is only intended to apply to non-compete clauses, those that purport to restrain an employee from joining a competing business or starting up their own competing business.  The consultation doesn’t apply to other more general post-employment restraints such as confidential information, non poaching of employees, non-solicitation or non dealing clauses, nor indeed does it seek to restrict the operation of common law fiduciary duties.
The entire proposal for reform is advanced on the at best anecdotal assertion that non-compete clauses hamper competition and entrepreneurialism. Reference is made to Israel and California as jurisdictions where there is respectively restricted use or outright ban on the use of non-compete clauses to support the proposition that such freedom has fuelled entrepreneurialism in their economies. No account is taken of the adverse impact on investment decisions taken by business seeking to locate elsewhere deterred from investing by that very freedom.  Further the consultation paper asks employers to provide examples of where the use of non-compete clauses has had a crushing effect on innovation and entrepreneurialism, and vice versa suggesting that the asserted link is at best limited.
As to the terms of the 2 proposals it is the first, requiring employers to compensate employees, that is the most newsworthy and most likely to garner support than an outright ban on such clauses.  Questions still to be determined are whether there should be a maximum period of time over which such clauses are permitted to operate. The paper suggests maximum periods of 3, 6 or 12 months.  Another important question is what should be the level of compensation paid by an employer seeking to impose such a clause.  The paper floats a number of possibilities based on a percentage of an average of earnings ranging from 605-100%.  The justification for the payment of compensation is that the payment operates as a dis9incentive to employers applying such clauses to all employees and that has to be right.
Its unclear if its intended that the common law principles that have guided the drafting of such clauses in the past be abandoned completely or will they operate in addition to the requirement to pay an employee for the period of the restraint. If so and the covenant is struck down by a court what happens to the compensation paid to the employee?
The paper also floats the idea that if non-compete clauses are permitted where compensation is paid an employer can waive the application of the non–compete clause and so avoid paying the associated compensation. If such a waiver questions to be resolved include what should be the duration of the notice an employer is to give. Three, 6 and 12 months are all suggested. However the nature of the waiver is also up for debate. Is it a unilateral decision by the employer or one to be arrived at by agreement with the employee.
Payment of compensation under a contract entered into at the point such a proposal is law may be many years before the date the employee leaves the employer. What if the employee is made redundant, surely the payment of non-compete compensation would only add to the financial cost of termination for an employer that may be in financial distress.
The more radical proposal is an outright ban on use of non-compete clauses in employment contracts.  However one of the justifications for the use of non-competes established in case law is that a mere confidential information clause may not provide adequate protection against the loss of confidential information (deliberate or otherwise) to a competitor business, as it may not become known until a significant period of time has passed and by when it may be too late to prevent irreparable damage.  For this reason it is our view that there will be no outright ban on non-compete clauses.
The consultation doesn’t close until 26 February 2021 and so if you wish to make your views known to the Government about these proposals you can do so here.

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