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Post-termination non-compete clauses: Proposed reforms

Dispute Resolution expert highlights proposed reforms to the law surrounding post-termination non-compete clauses in employment contracts, and considers what any changes might mean for employers.

Proposed reform: What employers need to know

Following termination of their employment, ex-employees often have the opportunity to utilise confidential information, strategic plans, customer/client details or other important information relating to the employer’s business, to benefit a new or rival business.  It is therefore common for employers to include, in the contract of employment, express contractual terms with a view to preventing employees from disclosing confidential information, competing, soliciting clients and poaching employees. Such provisions are often referred to as restrictive covenants or post-termination restrictions.

In December 2020 the UK Government announced that, to support economic recovery following Covid-19, it is exploring ways to boost innovation, facilitate the creation of new jobs, and increase competition.  The Government stated that post-termination non-compete clauses can act as a barrier to competition and entrepreneurial new business and it is therefore consulting on two key proposals:

  1. A requirement for employers to pay compensation to ex-employees for the duration of any post-termination non-compete clause. Any such measure may be complemented by a requirement for employers to disclose the exact terms of a non-compete clause to a new employee in writing before they enter into the employment contract, and putting into place statutory time limits on non-compete clauses.
  2. Banning post-termination non-compete clauses altogether.

The consultation, which seeks views from all interested parties from entrepreneurs and start-ups to large, multinational businesses, trade bodies, HR professionals and individual employees, also asks whether similar reform should be applied to other types of post-termination restriction, such as non-solicitation, non-poaching clauses and the like.

The consultation is open until 26 February.  Full details, including information as to how to respond, can be accessed here.

What might proposed changes mean for employers?

The common law of England and Wales already contains the significant safeguard that restrictions are only enforceable where they go no further than is reasonably necessary to protect an employer’s legitimate business interests.  Furthermore, in its 2018 response to an earlier, similar review, the Government acknowledged that post-termination restrictions are a valuable and necessary tool for employers.  A lack of any such protection for employers, whilst it may stimulate new ventures, could have the unintended consequence of stifling investment and innovation in existing businesses (i.e. such existing businesses may be reluctant to invest in training and innovation where employees can easily (and without legal repercussions) jump ship/set up in competition taking that valuable information with them).  It could also, of course, increase the potential for harm to be caused by the misuse of confidential information.  It is therefore perhaps unlikely that a complete ban on post-termination restrictions would be implemented in the UK.

A requirement for employers to pay compensation to ex-employees for the duration of any post-termination restriction, along with related complementary measures, could prove helpful to employers – albeit at some cost and additional administrative burden.  Ex-employees who may otherwise have been tempted to breach post-termination restrictions might be less inclined to do so in circumstances where they are in receipt of compensation.  This could have the effect of affording better protection for employers than even the current regime, and it could result in a reduction in restriction-related litigation.

How we can help

Walker Morris will monitor the progress of the consultation and report on key developments.

In the meantime, protecting employers and their confidential information remains a complex area of law.  Employers should therefore ideally work with specialist advisers, both pre-emptively when it comes to ensuring that their contracts are valid, enforceable and offer the best possible protection for the business; and if/when it comes to investigation and potential enforcement action in the event of any [suspected] post-termination breach.

Please do not hesitate to get in touch with our Dispute Resolution team if you have any queries or concerns.