The Government has today published two consultation papers looking at reforming the use by employers of exclusivity provisions and non-compete clauses in employment contracts. The new measures are being proposed as part of the Government’s commitment to “build back better” after the COVID-19 pandemic and aim to allow workers greater freedom to find new or additional work. In particular, the Government suggests that –
- A crackdown on restrictive exclusivity clauses could enable low paid workers across the UK to take up extra work if they want to.
- The reforms to non-compete clauses will remove unfair barriers that prevent workers from starting up or joining competing businesses.
- The plans will give workers more freedom over where and when they work, thus helping millions boost their earning capacity.
Both consultations are open for comment until 26 February 2021.
In 2016, the Government used a “Call for Evidence” to look at the prevalence and benefits/disadvantages of non-compete clauses. No further action was taken following this initiative as the Government concluded that, “the consensus view was that restrictive covenants are a valuable and necessary tool for employers to use to protect their business interests and do not unfairly impact on an individual’s ability to find other work. Common law has developed in this area for over a century and is generally acknowledged to work well”. Today’s consultation paper indicates that the issue of non-compete clauses is now being reconsidered due to the profound impact of COVID-19 on the labour market and as a means of unleashing innovation, creating the conditions for new jobs and increasing competition.
In its Non-Compete Clauses consultation, the Government is seeking views on:
- The option of making non-compete clauses enforceable only when the employer provides compensation during the term of the clause. In terms of the level of compensation, the Government is considering setting a percentage of the ex-employee’s average weekly earnings prior to termination of employment for the duration of the non-compete clause. The consultation paper asks for comments on compensation of 60%, 80% and 100 % of average weekly earnings (and also asks for thoughts on other amounts that might be appropriate).
- The option of compensated non-compete clauses would be complemented by –
- transparency measures including a requirement for employer to disclose the exact terms of a non-compete restraint in writing before the employee enters the employment relationship. Failing this, the clause would be unenforceable; and
- statutory limits on the length of non-compete clauses so that a restraint would only be enforceable if it did not exceed the statutory maximum period. The consultation paper asks for comments on maximum limits of 3, 6 and 12 months (and also asks for thoughts on other limits that might be appropriate).
- The consultation paper identifies the following as potential benefits of compensated non-compete provisions –
- Encouraging employers to consider if using a non-compete clause is reasonable and necessary for the particular individual;
- Creating a financial disincentive from using non-compete clauses as standard in employment contracts and reducing the misuse of these provisions;
- Disincentivising employers from imposing a restraint for an unreasonable length of time as this would incur additional cost;
- Reducing the risk of litigation as ex-employees may feel less inclined to breach a potentially enforceable restriction when they are compensated for its duration; and
- Addressing the deterrent effect of potentially unenforceable covenants.
- The consultation papers also seeks views on a second, alternative proposal of a complete ban which would mean that post-termination non-compete clauses in contracts of employment would be entirely unenforceable. The benefits of this option are suggested to be greater certainty for all parties and a positive effect on innovation and competition making it easier for individuals to start a new business and for skills and ideas to be shared between companies and regions. The consultation papers does recognise, however, the arguments against prohibiting non-compete clauses including the protection they give to legitimate business interests, including protection against loss of confidential information.
Exclusivity clauses are already unenforceable in zero hours contracts pursuant to ban which was implemented in 2015 on the basis that preventing workers from looking for work elsewhere when hours are not guaranteed is wrong. At that time, it was decided not to extend the ban to contracts other than zero hours agreement, but the Government says it is now revisiting that decision in response to evidence that the impact of the COVID-19 pandemic means some companies are not in a position to offer all their employees as many hours as they would like.
The proposal being consulted on is that exclusivity clauses should also now be prohibited in contracts where a worker’s guaranteed weekly income is less than the Lower Earnings Limit (LEL) – which is currently £120 per week (or 13.76 hours a week on the National Living Wage). 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 to boost their income.
The Government is also proposing that –
- like those on zero hours contracts, workers/employees with income below the LEL would also have a right not to be unfairly dismissed and not to be subjected to a detriment for failing to comply with an exclusivity clause; and
- to allow business to protect their interests where they employ well paid individuals who only work a few hours a week, any measures taken would include an exemption so that ban avoids capturing these individuals and exclusivity can be required from them. The proposal is to set an hourly wage cap above which the ban would not apply – the consultation paper asks for comments on a wage cap of £ 20, £22 or £29 per hour (and also asks for thoughts on other limits that might be appropriate).