Back in 2016 the Government published a Call for Evidence to better understand, it said, how non-compete clauses in employment contracts are used and why, and to assess the benefits and disadvantages associated with them. The Call was a mess in every sense, legally, practically and even grammatically, as we said here nowhere in the whole document was there any objective evidence at all of the “abuse” of covenants or the adverse impact on start-ups relied upon as the reasons for it. To no-one’s great surprise, the Call vanished into well-deserved obscurity and nothing was done in consequence of it.
But now the question is back, in the form of a new Government Consultation “on measures to reform post-termination non-compete clauses in contracts of employment”. This starts with an Introduction full of stirring but irrelevant political dog-whistles, bulging with references to potential unleashed, this great country, building back better, hard-working people, best place in the World, a fly-past by the Red Arrows and background music from Elgar. Some of the platitudes are too important to mention only once, even just within the Introduction. We see in succeeding paragraphs: “The Government is exploring avenues to unleash innovation, create the conditions for new jobs and increased competition…for these reasons we are seeking views on reforms to non-compete clauses” and then just six lines later “the Government is looking at measures to unleash innovation, create the conditions for new jobs and increase competition …that is why we are now seeking views on options to reform non-compete clauses“. It helps to fill a page, I guess.
Aside from the woeful cut-and-paste drafting from the Government’s Big Book of British Clichés, is there anything else for businesses to note in the Consultation? Yes and no.
For these purposes, “non-compete” is used in the specific sense of not joining a competitor, and not in its sometimes broader meaning of not soliciting the employer’s clients or staff. So far as can be seen, the reforms it considers would be forward-looking only and would not interfere with agreements already made.
The Consultation has also completely abandoned the 2016 premise that non-competes damage start-ups, presumably for no better reason than there was absolutely no evidence to support it, and clearly nothing of substance came back through the public responses to the Call at that time. Instead, the Government now relies on the purported desirability of the diffusion of ideas and expertise between companies. What it still seems to lack is any recognition that one company’s gain is usually another’s loss, and that the leakage of expertise and connections which non-competes are designed to prevent could easily be fatal to a small business. It also suggests that adequate protection could be obtained through reliance on IPR, confidentiality and non-solicitation clauses, skating blithely past the fact that what makes non-competes potentially enforceable at all is judicial recognition that those other terms are not consistently effective to protect the legitimate interests of former employers against unfair competition.
There are two-and-a-half key proposals for public review in this Consultation. These are:
- making all post-termination non-competition clauses void; or
- making them enforceable only if paid for.
The “half” is to compel measures to “enhance transparency and communication” around such clauses, and/or placing statutory limits on their length.
Although the Consultation nods approvingly to the successful and innovative economies of Israel and California where non-competes won’t fly at all, it seems wildly unlikely that it would lead to a ban on them altogether here. More likely is the introduction of a requirement (like those seen in a number of European countries) that the employer pays the employee for the duration of the restriction. An indication of the Government’s intentions in this respect appears in the Consultation questions – should this be at 60, 80 or 100% of pay, or something else? Not a cheap business, agreed, but quite deliberately so — those rates are specifically designed to be a deterrent to the unnecessary imposition of covenants.
Separately a suggestion is made that if the employer decides that it does not want to enforce the covenant, it has to tell the employee of this at least the duration of the covenant before his termination date, or be liable to pay out the balance. That will inevitably mean that an employee who is told out of the blue that his employer is waiving the covenants in his contract will fear that this heralds his dismissal, and will then find another job and leave, even if that were not the intention at all. It also implies that a business which closes either altogether or just a particular product line, perhaps quite quickly and for matters completely outside its control, could find itself stuck with a long tail of payments out in respect of a covenant which no longer had any legitimate interest to protect.
The question around transparency and communications is addressed by a proposal that the employee should be notified fully of the terms of the non-compete before he enters the employment contract. So far as I can see, this imposes on the employee only the requirement to read his contract before signing it, and maybe to take advice if he is unclear. It is hard to think that this really needs legislative provision. As to limiting the duration of covenants by law, the Consultation seems to recognise that employers will see a statutory maximum period as a permission, not a ceiling, and at the same time that a covenant set at the relevant statutory maximum could still be attacked as unreasonably long. In other words, a statutory cap would bring no advantages over the current position at all.
This whole consultation is based on the joint assumptions that employee mobility is a good thing, and that Britain is a nation of garden-shed inventors, prevented from reaching new scientific frontiers daily only by the tiresome fact of their being paid handsomely by someone else to stay where they are. There may be something in the first point, but not the slightest evidence in the Consultation of anything to the second. Both arguments ignore the benefits to the UK economy and to innovation and the ability to compete nationally and internationally of a stable workforce, proper management of confidential information and connections, and the certainty that the invention or innovation into which you have poured your company’s time, money and future will not be whipped off to somewhere else at the whim of your employee.