On 4 December 2020, the Government announced that they will consult on reforming the use of exclusivity and non-compete clauses in employment contracts. Among other things, it is predicted that the proposed ‘crackdown’ on such restrictive clauses will ensure that ‘up to 1.8 million low paid workers’ will be able to undertake extra work if they wish and ‘remove unfair barriers’ preventing individuals from becoming involved with competing businesses.
There are many that feel that this a welcome reform, especially given the current restrictions already being placed on industries and, by extension, the job market, due to the Covid-19 pandemic. However, employers may be wondering how the proposed reforms may impact their ability to protect their legitimate business interests.
Exclusivity clauses are commonly used in employment contracts to restrict workers from undertaking further work for other employers. There is already a ban on their use in zero-hours contracts, which came into effect in 2015. Currently, the relevant legislation (s.27A(3) of the ERA 1996) provides that the following provisions are unenforceable in a zero-hours contract:
- provisions which prohibit the worker from doing work or performing services under another contract or any other arrangement; or
- provisions which prohibit the worker from doing work or performing services under another contract or any other arrangement without the employer’s consent.
The ban ensures that workers who have no guaranteed hours are not prohibited from working for another employer if they wish to. It also gives zero-hours workers and employees rights of redress; zero-hours employees have the right not to be unfairly dismissed for breaching an exclusivity clause and, similarly, zero-hours workers have the right not to be subject to a detriment. However, there has been little case law in this area to date.
The Government is now revisiting this issue in the light of the effects that Covid-19 has had, especially on low income workers. Through this new consultation, the Government is seeking views on proposals to extend the ban (and the redress rights) to contracts where a worker’s guaranteed weekly income is less than the Lower Earnings Limit (LEL). This is currently £120 per week, which is equivalent to 13.76 hours if the worker is earning the National Living Wage. The Government’s hope here is that those who earn under this limit and who cannot secure reasonable hours from their employer, won’t be restricted from seeking additional work from another and in turn, will boost the economy. In addition, the Government has proposed an exemption (underpinned by an hourly wage cap) to this extended ban to avoid capturing well paid workers who work only a few hours per week, so that businesses would still be able to restrict such workers.
If the UK is to implement the proposed reforms, it would not be alone. Other countries, such as Germany and France, have restricted exclusivity clauses in order to stimulate growth and innovation.
The Government estimates that 9% of workers with one job would like to undertake more work and this increases to 26% for those earning under the LEL. Although barriers to further employment opportunities may be lifted by the proposals, practically speaking, workers may not actually be able to obtain additional hours from another employer in the present economic climate. Employers are currently facing further restrictions on the way they can operate due to the pandemic and it is likely that many won’t have sufficient work to offer to their existing workforce, let alone to new recruits.
Post-termination restrictions are a common feature of employment contracts for senior employees, particularly those who are considered to be crucial to the running of a business. Often, such employees will have had access to confidential information or will have built up relationships with clients or suppliers that are considered vital to the company. Employers use post-termination restrictions to try and protect their businesses when these employees leave, by restricting their activities going forward. However, such restrictions are only enforceable if they adhere to very strict requirements, with Courts taking into account the relatively uneven bargaining position of the parties.
The general position for such restrictions is that they are void due to the doctrine of restraint of trade, unless an employer can show that:
- it has a legitimate interest that is appropriate to protect; and
- the protection sought is no more than reasonable, having regard to the interests of the parties and the public interest.
Non-compete clauses are a type of post-termination restriction which restrict an employee’s ability to work for, or establish, a competing business for a certain period of time (and sometimes, within a certain area) after the termination of their employment.
Non-compete clauses are particularly onerous for the employee and significantly limit their ability to find new work when compared with other types of post-termination restriction. Generally, non-compete clauses are therefore much harder to enforce than other restrictions. However, there are limited circumstances where the Courts do recognise them as a legitimate form of protection. In simple terms, non-compete clauses are more likely to be successfully enforced if the Court finds that:
- it is not possible to adequately protect the legitimate interest of the business through other, less onerous means such as confidentiality clauses; or
- the employee’s particular knowledge or influence is such that the only way to protect the business is to ensure they cannot work for a competitor.
The Government is seeking views on non-compete clauses in employment contracts and has proposed the following:
- Mandatory Compensation: Firstly, the Government is considering making non-compete clauses enforceable only when employers provide compensation for the length of time that the employee is restricted. This is already the position in other countries such as Germany, France and Italy. The Government believes that this reform may mean employers will take a more considered approach to the use of non-compete clauses and the length of time for which they apply. Compensation may also make employees less likely to breach the restrictions. The consultation is seeking views on the level of compensation, proposing that this could be set as a percentage (60%, 80%, 100% or some other amount) of the employee's average weekly earnings prior to termination of their employment. Furthermore, the Government is seeking views on whether employers should then have the option of waiving the non-compete clause early, in order to avoid paying compensation.
- Complimentary Measures: The Government proposes further complimentary measures to enhance transparency where non-compete clauses are used and to limit their length. The Government has proposed a requirement whereby, if an employer does not disclose the terms of a non-compete clause in writing, before beginning the employment relationship, it will be unenforceable. Importantly, the proposals do not yet address how existing employment contracts containing non-competes would be treated or the fact that often such restrictions are introduced during employment (for example, following a promotion).
With regards to the length of a non-compete clause, currently, it is held that these should be ‘no longer than is necessary’. Courts usually enforce restrictions that are up to a year in length, depending on the facts of the case and the particular employee. However, the Government is now proposing a statutory maximum. Of course, as the reasonableness of the length of enforcement is very fact specific, it is unclear how the Government proposes to determine a maximum reasonable length that applies in all instances. The consultation is seeking views on whether the duration of a non-compete clause should be limited to three months, six months, twelve months, or some other period.
- Rendering Non-compete Clauses Unenforceable: Finally, the Government is seeking views on whether it should, as an alternative, make all non-compete clauses unenforceable (essentially banning them in their entirety). The Government suggests that this would provide greater certainty and have a positive impact on ‘innovation and competition’ and points to California as an example of where such non-compete clauses are void and to Israel, which has also significantly reduced their enforceability. The possibility of a complete ban may well cause alarm for companies that rely on these clauses in their employment contracts. However, non-compete clauses are not the only way a company can protect its legitimate business interests. The consultation paper makes it plain that the proposals are limited to non-compete clauses and would not impact other means which employers use to protect themselves such as confidentiality clauses, intellectual property law or other post-termination clauses including non-solicitation clauses, non-dealing clauses and non-poaching clauses. Although it must be noted that the Government does not ignore these clauses entirely, and does ask for views on whether the Government should consider restricting other post-termination restrictions.
In 2016, the Government concluded a consultation ‘call for evidence’ on non-compete clauses and ultimately found that the majority felt that ‘restrictive covenants are a valuable and necessary tool for employers’ and ‘do not unfairly impact on an individual’s ability to find other work’ and so decided that no further action was necessary at the time. It remains to be seen whether the Covid-19 pandemic will have changed these conclusions - it is clear that the employment landscape has changed dramatically and many may now welcome reforms with open arms.
The consultations are due to come to an end on 26 February 2021. In the meantime, employers may wish to consider reviewing how they currently protect their legitimate business interests in employment contracts and ensure that their confidentiality and intellectual property provisions (where applicable) provide adequate protection. Businesses may also wish to consider how best to utilise garden leave (often we see employers using garden leave in conjunction with non-compete clauses) in contracts and perhaps check that employee’s notice periods reflect their seniority and value to the business.
Government to consult on crackdown on unfair employment clauses in a boost for low paid workers.