In some jurisdictions, non-compete clauses are perceived as barriers to the entrepreneurial spirit driving economic recovery.
In others, however, they are an essential part of many contracts of employment aimed to protect the former employer’s confidential information and customer relations. The latter jurisdiction argues that without a non-compete clause, the former employee could join the competitor taking confidential information and causing the former employer substantial financial loss.
Indeed, different jurisdictions found different solutions to balance the conflicting interests of the former employer and the former employee. For example, under French law, whilst employed, an obligation of loyalty binds the employee to his employer, but once his employment has been terminated, the employee is free to join a competitor or start his own business in competition, as long as his activity does not constitute unfair competition or result in severe damage to the former employer’s business.
Under German law, post-termination non-compete clauses must be agreed in writing and provide a certain minimum compensation, i.e., 50% of the previous remuneration, to be made throughout the restricted period to be valid. To be enforceable, the non-compete clause is restricted geographically and in duration. In both Italy and Sweden also enforce mandatory payment plus legitimate interest and no further than necessary. However, in Australia, Hong Kong, Ireland, Singapore and Switzerland, there is no requirement for mandatory payment and non-compete clauses are enforceable when employers can show legitimate interest but no further than necessary.
In the USA, the approach to the enforceability of non-compete clauses varies from state to state. The Biden administration aims to prohibit non-compete clauses on a federal level as they are considered to hinder employees’ ability to seek higher wages, better benefits and working conditions by changing employment. The Biden administration proposes to ban non-compete agreements unless it is essential to protect narrowly defined trade secrets.
To support the economic recovery from Covid-19 in the post-Brexit world, the UK Government, on 4 December 2020, commenced a consultation, which ended on 26 February 2021, exploring ways to boost innovation and competition and increase labour mobility that may create the conditions for new jobs. In the consultation, employers were asked to consider two options relating to non-compete clauses:
- Option 1- Mandatory compensation – employers pay reasonable compensation to the employee for the duration of the non-compete clause.
- Option 2 – to ban non-compete clauses – make non-compete clauses post-termination in employment contracts unenforceable.
The Employment Lawyers Association surveyed employers and found that half of the employers surveyed considered that they would continue to use non-compete clauses if required to provide compensation for the period of the non-compete clauses, mainly for high-paid employees and workers. Some employers stated that they would increase their use of the other restrictive covenants, such as restrictions on soliciting clients and poaching employees, if the UK Government enforced any of the above options. However, the majority of the surveyed employers said that a ban on non-compete clauses would have a negative impact on their business and that they would not be able sufficiently to protect their business interests if the Government introduced a ban on non-competes.
We are still awaiting the Government’s response to the consultation. However, the fact that the Government initiated such consultation suggests that the Government is serious about instigating changes to restrictive covenants and, in particular, to non-compete clauses. We advise employers to revisit the restrictive covenants in their key employee’s employment contract and see if protection is needed to be bolstered and to what extent they need to be changed if the Government introduces mandatory compensation or a ban on non-compete clauses.
Our employment lawyers are experts in reviewing employment contracts and advising on restrictive covenants.
