The US regulator, the Federal Trade Commission, has outlined plans to ban US employers from applying new provisions in employment contracts, or relying on existing provisions, that restrict workers’ ability to move to new roles with different employers. So, will developments in the US influence the UK government and lead to reform of non-compete clauses in this country? We’ll consider that.
The FTC is consulting on a proposed new rule that would declare so-called non-compete clauses as ‘an unfair method of competition’. One in five US workers, 30 million people, are estimated to be subject to such clauses. The regulator says, in its view, the existing legal framework governing non-compete clauses in the US - formed decades ago, without the benefit of this evidence - allows serious anti-competitive harm to the labour market. If passed into law the new rule would apply broadly to contracts affecting a range of different categories of workers, including employees, independent contractors, interns, volunteers and apprentices.
Meanwhile, we continue to wait for the UK government's response to its consultation on reform of non-compete clauses in employment contracts - that consultation closed almost two years ago, in February 2021. The government is still in the process of analysing the responses to the consultation and we await the response.
The government is considering two possibilities. The first is to make non-compete clauses enforceable only when the employer provides compensation during the term of the clause, and they are looking at whether this could be complemented by additional transparency measures and statutory limits on the length of non-compete clauses. Alternatively, the nuclear option, to effectively ban them by making them unenforceable.
So, let's get a view on this. Ed Goodwyn joined me by phone from the London office to discuss what the UK government might do in light of what is happening in the US and elsewhere, and how employers may be affected:
Ed Goodwyn: "Yes, it's quite a hot topic in relation to non-competes both here in the UK and in the US and, and even though I'm commenting from a UK perspective, it's always interesting to see what other jurisdictions are doing because it might catch the eye of the UK government. They asked for contributions on their consultation s to whether it was considered that the UK law needs to be changed whereby there were more restraints on the use of non competes in the employment context and the commercial rationale from the government is that it was considered that non competes were being overused and they were acting as a brake on the UK economy, particularly in the tech sector, and they thought it was stopping healthy competition, and that's currently with the government and they are thinking about it. So, it was interesting for us to see two things in this context. Firstly, this issue, as I mentioned, has been debated in the US and recently some states have gone that way the UK government seems to be thinking, i.e., to restrict the use of non competes, either to ban them outright or to adopt more of a continental European model where non compered could only be enforced, frankly, if the employer effectively pays for it. We've also now seen a case from the Supreme Court here in the UK that, arguably, goes slightly the other way. It wasn't an employment case, it was a commercial agreement between two law firms, but within it was a non-compete covenant which was for 6 years. Now six years is a remarkable length of time, in the normal context, certainly in the employment context in the UK you won't get a covenant for more than 12 months. In the commercial context in the UK, you get much longer periods than that, but they still are judges on what is reasonable to protect the legitimate business interest and 6 years is really out there, on the outer limits, nonetheless, in this case the Supreme court was prepared to uphold a 6 year non-compete. Now, that's interest so far as it goes, but the real interest is whether that sort of case will be considered by the government in it's consultation period as another example of why they need to legislate on this to restrain the use of non competes, particularly in the employment context."
Joe Glavina: "One of the options being considered by the government is mandatory compensation to be paid by employers who want to use non-compete clauses. Is that likely?"
Ed Goodwyn: "I think that's quite likely. It would be aligned to, as I've mentioned already, quite a few other jurisdictions' approaches. Arguably, it's more reasonable in the sense that if an employer really needs that protection for its legitimate business interest, well, it ought to pay and, equally the employee who's at the other end of the it won't become destitute, will still have an income whilst effectively they're sitting on their hands waiting for the non-compete period to end. It could equally be that the government takes a view that we're not going to make any changes. There are a lot of lawyers out there saying 'why change that which isn't broken' and there is an argument that the current case law takes into account the balance between the need for business to protect its interests, and not going to force us to become anti-competitive. But I think the government perhaps will use this as an opportunity to change, yes."
The UK government's consultation is called 'Measures to reform post-termination non-compete clauses in contracts of employment' closed on 26 February 2021 and we are still awaiting the government's response. As soon as we have that will return to this important topic and, doubtless, hear from Ed again. Meanwhile, as far as developments in the US are concerned, on Tuesday New York lawyer Ben Stockman talked to this programme about the FTC's proposals and what might happen in the states. That programme is called 'FTC proposes rule to ban non-compete clauses in US' and we have put a link to it in the transcript of this programme.
LINKS
- Link to HRNews programme: 'FTC proposes rule to ban non-compete clauses in US'
