As we highlighted in a previous article, the Government launched a consultation on the 4th December 2020 as to whether their needs to be reform / abolition of non-compete clauses. That consultation closed on the 26th February 2021. The Government's response to the consultation is expected soon.
Nevertheless, over the last year, there have been significant international developmenets as regards non-compete clauses, which may well influence the UK Government's response to the consultation, and subsequent legislation arising out of it.
Non-Compete Clauses: The Consultation And The Reasons For It
The consultation in relation to non-compete clauses was launched on the 4th December 2020 as part of the Government’s “build back better” plans. At the time, the Government stated: “To support economic recovery from the impacts of COVID-19, the government is exploring avenues to boost innovation, create the conditions for new jobs and increase competition.”
The then Secretary of State for Business, Energy and Industrial Strategy, Alok Sharma, added: “We want to ensure every worker has the freedom and flexibility to work in the way they want, where they want – whether that’s topping up their pay packet by taking on additional work, or being able to start their own business with the skills they’ve gained throughout their career. [We take] another step on our path to making sure the UK is the best place in the world to work, start and grow a business as we build back better from the pandemic.”
Essentially, the Government are looking to promote a more entrepreneurial culture, particularly in the area of the next generation of emerging technologies, such as advanced robotics, artificial intelligence, the Internet of Things, 3-D printing, automation, and blockchain. As non-compete clauses are a barrier to competition, the Government take the view that reform of them, or even their abolition, could help to nurture more start-up businesses.
Should the Government go down the reform route, as opposed to complete abolition, then some of the measures under consideration include a requirement to pay the employee for the duration of the non-compete restriction, and to impose a statutory limit on how long the restrictions imposed by non-compete clauses can last for.
One of the considerations mentioned by the Government behind the idea of forcing employers to compensate employees for the duration of any non-compete restriction they are subject to, is that it will deter employers from including “unnecessary” non-compete clauses in employment contracts.
International Developments
One of the factors that may influence Government thinking on the issue of non-compete clauses are developments in other countries on the subject.
Germany, Italy, and France have already introduced rules which compel employers to compensate employees for the duration of any non-compete clauses they are subject to.
As a result of an amendment to Finland's Employment Contracts Act (55/2001) on the 10th November 2021, with effect from the 1st January 2022, employers in Finland are now also under a legal obligation to compensate employees in that country as well for the period of any non-compete restrictive covenant.
Furthermore, in the USA, there have been increasing moves to reform, limit, and abolish non-compete clauses. In Illinois, for instance, an amendment to the Freedom to Work Act introduced a variety of new measures to limit non-compete clauses with effect from the 1st January 2022. This included a complete ban on non-compete clauses in relation to employees earning less than $75,000.00 per annum, with the threshold to increase by $5,000.00 every 5 years.
In Colorado, non-compete clauses have been banned for some time, unless used to protect trade secrets, protect purchasers re sales of a business and / or its assets, recover training / education expenses re employees with less than 2 years service, and in relation to management and executive employees. Now, with effect from the 1st March 2022, breaches of the State's non-compete laws will become a criminal offence.
Furthermore, back on the 9th July 2021, President Joe Biden signed an 'Executive Order on Promoting Competition in the American Economy' with the aim of pursuading the Federal Trade Commission (FTC) to set down rules and regulations which "curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility."
Meanwhile, in Canada, the Province of Ontario has banned the use of non-compete clauses under Bill 27, Working for Workers Act, 2021, which amends the Employment Standards Act, 2000. The ban has just been introduced with effect from the 2nd December 2021. The only two exceptions to the ban are in relation to executives and with respect to sales of part or all of a business in which the seller will become an employee of the purchaser.
Given the recent international trend towards limiting, and in some cases, banning, the use of non-compete clauses in order to promote greater competition and entrepreneurship, this will doubtedly have an impact upon the outcome of the UK's review of non-compete clauses.
The UK Government is expected to publish its response to the consultation on non-compete clauses soon.
