ELA Responds to the Government’s Consultation on Non-Compete Covenants

The consultation paper is available here and an earlier bulletin on it is here.

On 26 February 2021 the Employment Lawyers’ Association (“ELA”) published its response. ELA’s Working Party was chaired by Paul Goulding QC and Jonathan Chamberlain, so it comes as no surprise that the response is punchy, forensic and conspicuously well-informed.

The 111-page document is made up of a detailed explanation of the current law (useful for any students or rusty practitioners looking for a short but thorough overview of the relevant principles); an analysis of the available evidence on the impact of non-compete clauses; ELA’s answers to the 37 consultation questions; a comparison of post-termination restraints in different jurisdictions; and the results of a survey of 128 employers undertaken by ELA via its members. 

The reader of ELA’s response is left with two overarching questions for the Government: 1) Why are you suggesting this?; and 2) Have you really thought this through? (though naturally ELA never articulates its points in such a quarrelsome manner).  

The first question emerges as, point by point, ELA explains:

-       The Government concluded no action was necessary in this area less than three years ago following its 2016 Call for Evidence. At that time the Government said “The consensus view” is that “restrictive covenants are a valuable and necessary tool for employers to use to protect their business interests and do not unfairly impact on an individual’s ability to find other work.”

-       Although the pandemic has had a massive impact on the economy overall, ELA has seen no evidence of any material change that is specifically relevant to post-termination restraints and has not received reports from its membership of any concerns in this regard.

-       To the contrary, ELA’s survey (conducted after the pandemic began) revealed no appetite for substantial reform, with 78% of respondents indicating a ban on non-compete clauses would have a negative impact on their business.

-       There is no clear evidence that the existing regime operates as a bar to the Government’s stated objectives (boosting innovation, creating jobs and increasing competition) or that the proposed reforms would help to achieve them. The Government’s consultation paper does not cite any such evidence and the empirical research/literature ELA is aware of presents an inconsistent picture.

-       Non-competes can be used by young, innovative businesses to protect themselves from bigger and better-established rivals as well as vice versa and the employees keen to escape covenants today are the employers who are keen to enforce them tomorrow.

The second question arises from a variety of issues/questions ELA raises such as:

-       The common law has been weighing up the freedom of employees against the rights of employers for seven centuries. Ill-thought interference with the complex, multifaceted principles that have developed as a result may risk “tipping the scales too far in one direction”.

-       There are grounds for questioning whether the Government’s proposals will undermine its stated objectives. For example, a ban on non-competes may make UK companies less attractive to private equity and venture capital investors whose funds can be a key driver of innovation.

-       There may be other unintended consequences, for example, greater use of garden leave and longer notice periods meaning restrictions end up being stricter and longer than they currently are, or a shift by multinational employers to engaging employees in other, friendlier jurisdictions.

-       There are many complexities with the Government’s proposals that have not been addressed in the consultation paper. For example, if a ban is introduced on non-competes, will it have retrospective effect or will new non-competes be banned but existing ones be enforceable? What will be done about equivalent restrictions in shareholding agreements? If mandatory compensation is introduced in relation to non-competes, what happens if an employee accepts compensation but breaches the covenant anyway? And so on.

ELA’s overall conclusion is a reiteration of its response to the 2016 Call for Evidence: “there are in our view strong arguments that the body of law that has been developed by the courts is a proven and effective means of striking a fair balance between the interests of the employee and the employer and it is hard to see how legislative intervention could be of any benefit in making that balance fairer.”

However, ELA does acknowledge there are issues with the current system, most particularly in terms of transparency and enforcement, including employees being deterred from challenging unreasonable covenants for fear of potential cost consequences.

ELA volunteers some proposals (which it expresses varying degrees of enthusiasm for) to address these issues, which it suggests the Government could consider as an alternative to substantive change. These include:

-        Requiring an employer to clear a higher hurdle than the standard “serious issue to be tried” to secure interim relief in respect of restrictive covenants.

-        Changing the costs rules for employee competition proceedings to something more favourable to employees (for example each party bearing its own costs as in the Employment Tribunal).

-        Introducing a requirement, analogous to the one before an individual can waive their statutory rights under the Employment Rights Act 1996 or the Equality Act 2010, that an employee should obtain independent legal advice before agreeing to be bound by a non-compete covenant.

-        Requiring employers to remind employees on an annual basis of any non-competes that apply to them.

Should the Government decide it has now no longer had enough of experts, there is plenty of food for thought in ELA’s response, which bears careful consideration before any significant decisions are made.

A copy of ELA’s response can be found here.

This bulletin was written by Kerenza Davis.