The end of non-compete clauses and restrictive practices?
A non-compete clause bans an employee from joining a competitor or setting up a competing business for a certain period of time or within a specific geographical area, or both, on termination of the individual’s employment. They are aimed at protecting the employer’s trade secrets and are often included in the employment contracts of senior executives who have access to highly confidential information. In both the US and the UK non-compete clauses have been used for decades, although in the UK they are traditionally harder to enforce than other types of restrictive covenant. However, there are now proposals in both countries to ban these clauses.
Non-compete clauses in the US
The US Federal Trade Commission (FTC) is proposing to introduce a new rule that would ban non-compete clauses, the majority of which last more than two years. It considers that these clauses hurt business innovation, harm competition and suppress wages. In addition, these clauses have become commonplace among lower paid workers with approximately one in five American workers now bound by them. The FTC is concerned because these workers, who don’t have access to confidential information, are unable to leave their jobs as they can’t afford to move or to wait before starting a new job. The comment period is open to the public until 19 April 2023.
Is a ban something we’re likely to see in the UK?
In December 2020, the UK Government launched a consultation on reforming non-compete clauses in employment contracts in order to maximise opportunities for individuals to start new businesses and find new work.
The consultation sought views on two options: to ban non-compete clauses altogether or to make them enforceable only where the employer provides compensation for the duration of the restriction. In the latter case the consultation also sought views on the level of compensation, whether the employer should be required to disclose the terms of the non-compete clause before the employee started work and asked whether there should be a statutory limit on the duration of a non-compete clause.
No poaching covenants
On 9 February 2023, the Competition & Markets Authority (CMA) published its guidance on avoiding business cartels being formed by, amongst other things, the use of no poaching agreements by businesses working with other businesses. The guidance identifies this practice as one of three areas of anti-competitive behaviour and avows to clamp down on this. Whilst the embargo only relates to businesses working with other businesses, it does seem to be an example of an incursion into the canon of law in restraint of trade. It will be interesting to see if there are more developments in this direction which go further.
Both the FTC and UK Government proposals and the CMA guidance are aimed at stimulating the economy post-covid by providing opportunities for entrepreneurs and competitive start-ups.
The UK Government’s consultation closed on 26 February 2021 and over two years later the Government’s response is still awaited with no published timeframe. In March 2022 an MP confirmed the Government is still analysing the responses. Could there be a sea change in the established orthodoxy? Perhaps not, but we may well see more gradual erosion of some of the restrictive practices that are now no longer fashionable and in keeping with a Government keen to deregulate and free up the economy.