Use of non-compete and exclusivity clauses set to be limited

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

Post-termination non-compete clauses

Non-compete clauses are used 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.

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.

If any of these changes were to be implemented, they may potentially raise the need for other post-termination restrictions to be tightened. For example, non-solicitation and non-dealing clauses – which stop the employee from both soliciting clients from a former employer and from dealing with the client – may need to be reviewed. Confidentiality clauses may also need to be tightened.

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.

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.

Parting note

Currently, both these clauses can be difficult to enforce because employers will need to show the judge, if a case goes to court, that they are a reasonable way of protecting their 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.

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