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Mandatory Compensation

The Government is considering the option of making post-termination, non-compete clauses in contracts of employment enforceable only when the employer provides compensation during the term of the clause.

Although there is no statutory definition of a post-termination non-compete clause they are generally understood to refer to clauses that restrict an ex-employee’s ability to work in similar employment for a competing business, or to establish a competing business for a specified period after termination of employment.

We recognise that a number of wider post-termination ‘restrictive covenants’ are used by businesses and organisations to protect their interests in a number of areas. Examples include:

• Non-solicitation clauses – used to prevent an employee soliciting employees and customers from their employer or ex-employer’s business for a period after they leave the business.

• Non-dealing clauses – used to prevent the departing employee from having ‘dealings’ with their ex-employer’s clients for a period after they leave the business.

• Non-poaching clauses – similar to non-solicitation clauses, used to prevent an exemployee hiring employees of their former employer’s business.

• Goodwill protection clauses – prevent the seller of a business going immediately into competition with the buyer of that business after the sale.

Consultation on measures to reform post-termination non-compete clauses in contracts of employment

[Wrigleys comment] Please note that this consultation focuses on ‘non-compete’ restrictions rather than on the other potential post-termination restrictions listed above.

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* 1. Do you think the Government should only consider requiring compensation for non-compete clauses or do you think the Government should consider requiring compensation where other restrictive covenants are used? Please indicate below.

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* 2. If you answered ‘non-complete clauses and other restrictive covenants’, please explain which other restrictive covenants and why.

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* 3. Do you foresee any unintended consequences of limiting the scope of reform to non-compete clauses? If yes, please explain your answer.

The Government is considering applying the requirement for compensation where non-compete clauses are used in contracts of employment.

We recognise that non-compete clauses can be used in wider workplace contracts or other contracts which have a bearing on the  workplace, for example in contracts for services, consultancy agreements, partnership agreements, Limited Liability Partnerships, employee share options and franchise agreements to name a few.

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* 4. Do you agree with the approach to apply the requirement for compensation to contracts of employment?

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* 5. Do you think the Government should consider applying the requirement for compensation to wider workplace contracts?

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* 6. Do you think the proposed reform to non-compete clauses in contracts of employment could have an impact on the use of, and/or the enforceability of, non-compete clauses in wider contract law? If yes, please explain how and why.

The Government is considering what a reasonable level of compensation would be for the period of the non-compete clause. The level of compensation needs to be high enough to deliver the aims of encouraging employers to consider whether the use of a non-compete is necessary for a particular role before inserting it into a contract, and to create a financial disincentive to their use. It should also reflect that an individual bound by a non-compete clause may be restricted from making a living in the area where their skills and expertise are most applicable and the harm this could have on competition and innovation.

To provide legal certainty, and to provide clarity to both employers and employees, the Government is considering a level of compensation that is set as a percentage of the ex-employee’s average weekly earnings prior to termination of employment for the duration of the non-compete clause.

Consultation on measures to reform post-termination non-compete clauses in contracts of employment.

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* 7. Please indicate the level of compensation you think would be appropriate:

Currently in the UK an employer can unilaterally waive a non-compete clause at any point during the employment relationship. Were the Government to introduce mandatory compensation there is a risk that employers continue to use non-compete clauses broadly and then use this flexibility to remove the clause at the end of the employment relationship to avoid paying any compensation. While this would then allow the ex-employee to establish their own business in competition or to take up employment with a competitor, the existence of the non-compete clause in their contract may have affected their decision-making during the employment relationship.

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* 8. Do you think an employer should have the flexibility to unilaterally waive a non-complete clause or do you think that waiving a non-compete clause should be by agreement between the employer and the employee? Please indicate your answer below.

To disincentivise employers from inserting non-compete clauses and then unilaterally removing them at the end of the employment relationship, the Government could require that an obligation for the employer to pay compensation for some or all of the period of the non-compete clause is retained unless a defined period of time has elapsed between the waiving of the clause and the end of the employment relationship.

How this could work with an example of a 6-month period:

The employer could at any time during the employment relationship waive the post-termination non-compete clause in writing to the employee. In such case, the employer's obligation to pay compensation would cease to exist after 6 months have elapsed from the day the clause was waived. Were the employer to give notice to waive the non-compete 6 months prior to the end of the employment relationship, the employer would not be required to provide the worker with any additional compensation once the employment has ended. 

If, on the other hand, the employer waits to give written notice until a month before the end of the employment relationship, the employer then will be required to compensate the employee for 5 months after the employment relationship has ended. The employee would be able to compete immediately after the employment relationship has ended. Consultation on measures to reform post-termination non-compete clauses in contracts of employment

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* 9. Do you agree with this approach? If not, why not?

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* 10. How long do you think the time period within which the employer must waive the restriction before the termination of employment should be?

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