We responded to the Department for Business and Trade’s Working Paper on options for reform of non-compete clauses in employment contracts. Our industry supports the government’s objectives of boosting labour market dynamism and promoting competition and innovation. However, we are seriously concerned that the proposed reforms to non-compete clauses risk undermining these objectives. More broadly, the proposals outlined in the working paper underscore concerns about a lack of coherence across the multifaceted policy and regulatory landscape that determines the UK’s attractiveness in the face of ever stronger international competition for investment, talent and growth.
We do not believe the government should proceed with proposals to ban or restrict the use of non-compete clauses. The benefits of this type of restrictive covenant are clear and well-understood, particularly in knowledge-intensive industries. Statutory reform of non-compete clauses will have significant implications for the UK’s international competitiveness and attractiveness as a place to do business, while also undermining the very policy aims the government is aiming to achieve.
Key messages and recommendations include:
- The existing legal framework – which has evolved to reflect economic needs over the past 100 years – strikes a careful balance between protecting employers’ interests in their trade secrets and other confidential information and employees’ freedom to work and to move freely between jobs. Non-compete clauses that go beyond what is reasonably necessary to protect legitimate business interests, including the protection of confidential information, are already unenforceable.
- Non-compete clauses are often the only way to pre-emptively protect confidential information and intellectual property (IP) when employees move to competitors. Confidentiality clauses alone are insufficient to protect knowledge-based industries, with breaches difficult to prove and only provable after the fact, once highly valuable confidential information has been transferred.
- The UK’s current approach to non-compete clauses is aligned with other major financial centres, including New York, Delaware, Singapore, Hong Kong and Dubai (DIFC), where reasonable non-compete clauses remain enforceable. There is no widespread or settled international practice in favour of blanket bans on non-compete clauses or statutory limits on their duration. Where bans have been introduced, or attempted to be introduced, these have proven detrimental or failed.
- Non-compete clauses promote competition and innovation in high-value industries, including financial and related professional and business services, and for economy-wide research and development (R&D) activity. If employees could take their employer’s confidential information with them when moving to a competitor, their former employer’s investment in R&D would be of limited utility, the competitor would gain an unfair competitive advantage, and there would be significant market disincentive to further investment in innovation.
- An outright ban on non-compete clauses would weaken protection for confidential information and reduce incentives to invest in innovation and R&D in the UK. This could prompt the transfer of jobs, skills and valuable business information outside the UK. We urge the government to recognise the scale of international competition and the risks of undermining the UK’s commercial attractiveness.
- A blanket duration limit – whether or not tied to company size – is a blunt instrument unsuited to dealing with the wide variety of circumstances in which restraints apply. The legitimate business interests in restraining an employee depend on factors including the employee’s role and access to commercially sensitive information. Long restraints may be reasonable for highly remunerated and skilled employees who contribute to the creation of IP and business-critical information, which would be difficult to protect with a confidentiality clause alone. The variety of circumstances in which any duration limit would apply means the employer, the employee, and the courts are better placed to assess the reasonableness of a restraint’s duration on a case-by-case basis.
- Salaries are an imperfect proxy for employees with access to confidential information. If non-compete clauses are being used inappropriately for low-paid workers, there may be merit in exploring the use of a “remuneration threshold” or even tiered thresholds, whereby escalating duration limits apply for lower earners, and for higher earners, no limit would be applicable.
- There is no basis for the introduction of restrictions to other restrictive covenants or wider workplace contracts. Other types of restrictive covenants, such as non-solicitation covenants, provide essential protection against the very real damage which can be caused by an employee leaving a business and actively soliciting or poaching the clients/ employees of that business. These covenants afford businesses a short period of time to shore up these essential relationships and do not prevent departing employees from being employed elsewhere, including by a competitor.