Government to limit use of non-compete clauses

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The government is looking to limit the use of non-compete clauses in an effort to stimulate a more entrepreneurial culture, particularly in the tech sector.

Rather than encouraging entrepreneurs, taking [non-compete clauses] away might actually make entrepreneurs or investors think twice about basing start-ups in the UK” – Stefan Martin, Hogan Lovells

According to a report in the Financial Times, UK ministers are aiming to nurture start-ups by making it harder for employers to use restrictive covenants to prevent staff leaving to set up rival companies.

Non-compete clauses often stop departing employees working for competitors, starting a rival business or working with former clients, often for many months after they leave an employer.

Charlie Nunn, head of personal banking and wealth management at HSBC, was named the new chief executive at Lloyds Banking Group yesterday, but his notice period and non-competition obligations mean it could be a year before he takes the helm.

Government is concerned that current use of the clauses by employers is frustrating workers who want to leave and set up their own business.

The FT reported that the Department for Business, Energy and Industrial Strategy (BEIS) is launching a consultation into the use of non-compete clauses in the coming days.

One month before the UK voted to leave the EU, BEIS published the outcome of a similar consultation into non-compete clauses.

The majority of responses fed back that restrictive covenants are a valuable and necessary way for employers to protect their business interests and do not unfairly impact on individuals’ ability to find other work.

“Common law has developed in this area for over a century and is generally acknowledged to work well. Having built up a picture of the UK experience via this call for evidence, we have decided it is not necessary to take any further action at this stage,” BEIS said in a statement at the time.

Stefan Martin, partner at Hogan Lovells, said: “Non-competes are a key weapon in a company’s business protection armoury. Rather than encouraging entrepreneurs, taking them away might actually make entrepreneurs or investors think twice about basing start-ups in the UK. Abolishing non-competes would make it more difficult to stop key employees walking out and setting up a rival business, making establishing or funding start-ups much more risky.”

Jo Broadbent, counsel knowledge lawyer at Hogan Lovells, added: “It’s interesting to see this issue raising its head again. Back in 2016 a BEIS Call for Evidence explored whether non-compete clauses prevent individuals from creating start-ups or growing a business.

“That review concluded that the existing framework works well and strikes the right balance between protecting employers’ business interests and allowing individuals to find other work. It appears that the end of the Brexit transitional period has led government to think again, with an eye on making the UK an attractive location for entrepreneurs in the tech sector.”

An outright ban is not expected according to the FT’s source, but ministers want to examine whether non-compete clauses are reasonable, given UK laws around confidentiality and intellectual property.

In France, a “non-derisory” amount of compensation must be paid to an employee for the duration of any non-compete restrictions. Failure to do so may lead to a legal claim and the release of the employee from the restrictions in the clause.

Personnel Today has approached BEIS for comment.