12 April 2023

What is the future for non-competes?

Restrictions preventing an employee from joining a competitor or setting up in competition for a period (typically between 6 – 12 months) after their employment has ended (a “non-compete”) is a common, albeit at times controversial, feature of UK employment contracts.

But changes appear to be afoot and it seems likely that non-competes as we know them may look a little different in the future.

Used appropriately – such as limiting their application only to senior employees or to those with access to highly confidential information and trade secrets, and then only for a reasonable period – a non-compete makes complete sense. It allows an employer to safeguard its position, preventing parts of its business from being diverted elsewhere, which other post-employment restrictions (such as confidentiality obligations and non-solicitation restrictions) cannot always fully protect.

Conversely, used inappropriately or abusively (as can often be the case), a non-compete arguably prevents free trade, restricts the labour market and innovation and, on a personal level, has a detrimental impact on an individual’s ability to earn a living. The ‘standard issued’ non-compete can, fairly regularly, result in hard working and innovative individuals taking time out to avoid any alleged breach and/or dispute with their former employer, despite the fact that such non-compete might actually be unenforceable. Perhaps the State of California, where non-competes have been banned for some time, is a good place to find evidence for these stifling of free trade and innovation arguments: Silicon Valley has, after all, essentially been built by employees leaving large tech firms and launching their own startups, as they are generally free to do albeit ostensibly in “competition” with their previous employer.

It is because of this tension that the UK government previously consulted on the use of non-competes and associated reforms. The consultation (called: “Measures to reform post-termination non-compete clauses in contracts of employment”) looked, in particular, at:

  • whether employers should be required to pay employees during a non-compete period (with such periods being limited in duration); and
  • the idea of banning them altogether.

Unfortunately, despite that consultation closing just over two years ago, we are still awaiting its outcome. That said, since the closing of the consultation, there have been some interesting developments in the non-compete area in other jurisdictions.

The most significant development has perhaps been in the US. Following an executive order to all agencies by Joe Biden to increase productivity, the US regulator, the Federal Trade Commission (“FTC”), has recently outlined plans to ban US employers from using non-competes or relying on existing non-compete provisions. The proposed new rule would categorise a non-compete as an “unfair method of competition’. However, the draft rule does provide for a carve-out in the context of a corporate transaction where a shareholder stays on with the business as an employee.

The fact that just weeks after the FTC outlined its plans, the UK Competition and Markets Authority reminded employers to avoid anti-competitive behaviour (such as wage fixing and agreements not to employ others’ employees) might suggest that we are keeping an eye on what is going on across the pond.

Anecdotally, some employment lawyers in the US believe that the proposed FTC rule is too vague, generating more questions than it answers. They anticipate that, following comment from various stakeholders, the rule (in the event it is passed) will be narrowed – for example, to create further exemptions for senior level executives (i.e. still permitting the use of non-competes in respect of their employment).

That said, other commentators believe a carve out for senior employees could be counter to the overriding executive order designed at increasing productivity, noting that such employees typically generate growth and innovation so restricting them would not achieve the order’s aims. There is also concern that having such a carve out would lead to ‘satellite’ litigation about an employee’s seniority and/or whether an associated non-compete is enforceable.

But perhaps recent developments north of the border, in Canada, will help reassure US lawyers. In 2021, the province of Ontario introduced a similar law (through the “Working for Workers Act”) banning the use of new non-competes (but not those already in existence), unless it is agreed in the context of a corporate transaction (similar to the FTC’s carve out) or for senior employees holding specific positions (for example, Chief Executive Officer, Chief Finance Officer or Chief Legal Officer).

Perhaps it is too early to tell whether the Ontario position strikes the right balance, but it does highlight that this topic seems to be firmly on the agenda in many countries and that changes here in the UK seem likely, especially given the current status in the US. It will certainly be interesting to see whether and how international developments such as those in the US and Canada inform or contribute to the debate here in the UK.

More generally, perhaps one could look closer to home to see how other European countries create a fairer non-compete environment. One of the points the UK government consulted on was the need to pay employees during any non-compete period and both France and Germany (for example) have adopted this model for some time. The financial consequences really focus an employer’s mind as to which employees they need to restrict, and this seems to strike a good balance between giving employers the ability to subject an employee to a non-compete (and pay them) where circumstances require whilst addressing the personal financial impact on the employee. Arguably, such model would be even fairer if the paid non-compete could only be used for senior employees, adopting the concept from Ontario.

So, is there a future for non-competes? I believe so, but perhaps in a different form to what we are familiar with in the UK. Such changes are still up for debate and might, in practice, be informed by any conclusions of the FTC. But in any event, any changes will likely result in a degree of uncertainty and further questions, keeping both employers and lawyers busy. For example:

  • how would garden leave provisions be considered in light of any ban or restriction on the use of non-competes: are they a non-compete through the backdoor or a standalone contractual provision?
  • will employers try to be more creative in their use of breach of non-solicitation and non-dealing covenants to try and reach the same outcome as a non-compete?
  • if non-competes are faded out or restricted in different jurisdictions, how will global companies who grant stock/equity under global plans that tend to be linked to non-competes work? For example, will we see a move away from global harmonised plans to a country specific approach?

Watch this space, as they say…

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