Scrapping non-compete clauses in favour of a stronger economy

Njeri Wagacha writes about the new era of employment in world without restrictive non-compete clauses

• By banning non-compete clauses, the FTC can unlock significant economic potential, projecting an increase in new business formation and job creation.

Non-compete clauses have always been ingrained into job market. Although originally designed to protect employer interests, they restrict employees from seizing better opportunities in their industries. While these provisions are generally set in stone and accepted, recent developments in the UK and US as well as other regions, have forced us to rethink this entire system and move into an economy that is less restrictive.

The UK’s recent actions signal a significant shift in how non-compete clauses are perceived and regulated. In the past, the UK lacked specific statutory provisions addressing these clauses, leaving employers to rely on common law principles. Fast forward to a 2020 UK government’s consultation, and a new era has dawned.

Recognising the need for reform, the UK government proposed limiting the duration of non-compete clauses to a maximum of three months post termination of the employment contract. This reflects a broader commitment to forging a fairer, more competitive labour market, where employees have greater freedom to pursue new opportunities without a clause hanging over their heads.

This change not only underscores the UK’s commitment to fair competition but also aligns with a growing global trend towards rebalancing the scales between employer protection and employee mobility. By placing a statutory limit on non-compete clauses, the UK is paving the way for a more dynamic and innovative business environment, where the flow of talent and ideas is not unduly stifled.

However, the change is not yet in force as the draft legislation is yet to be presented to the U.K Parliament.

Across the Atlantic, the United States has taken an even more radical approach. In a landmark decision, the Federal Trade Commission (FTC) implemented a rule that bans non-compete clauses in employment contracts as of September 2024. This sweeping change, which comes after extensive analysis and public consultation, represents a major shift in the regulatory landscape.

The FTC’s decision is rooted in a belief that non-compete clauses often hinder fair competition and limit job mobility. By banning these clauses, the FTC can unlock significant economic potential, projecting an increase in new business formation and job creation.

There have been legal challenges against the complete ban on non- compete agreements across some states including Texas, Pennsylvania, and Florida. On 20 August 2024, the United States District Court for the Northern District of Texas in Ryan, LLC v. FTC ordered that the complete ban is unlawful and prohibited its implementation. The decision applies nationwide, meaning the complete ban cannot be enforced by employers anywhere in the United States. The FTC is now considering a potential appeal of the Texas court’s decision.

Notwithstanding the legal challenges, this move positions the US as a leader in promoting a freer and more competitive labour market, where employees are not unduly constrained by their former employers. For the UK to the US, this shift is cascading into African employment.

In East Africa, for example, the regulation of non-compete clauses is still in its infancy. Kenya is the only country in the region with specific legislation governing these clauses, and even here, courts often apply a reasonableness test to determine enforceability.

A recent case in Kenya highlighted the importance of ensuring that non-compete clauses are carefully drafted to avoid unjustly restricting an employee’s ability to work. The court’s decision to invalidate a 12-month non-compete clause as overly broad serves as a reminder that these provisions must be balanced and reasonable.

The global shift in how non-compete clauses are regulated presents both challenges and opportunities for employers. On the one hand, these clauses can still play a vital role in protecting trade secrets and sensitive business information. On the other, the growing emphasis on fairness and job mobility means employers must tread carefully when crafting these agreements.

To navigate this evolving landscape, employers should consider several key factors:

• Fairness and reasonableness: Non-compete clauses must be tailored to the specific circumstances of the employee and the industry. Overly broad or restrictive clauses are likely to be challenged and may ultimately prove unenforceable.
• Alternative protections: Employers should explore other protective measures, such as confidentiality and intellectual property agreements, to safeguard their interests without relying solely on non-compete clauses.
• Regulatory awareness: As the legal landscape continues to shift, employers must stay informed about changes in regulations and be prepared to adapt their contracts accordingly.

As the tide turns on non-compete clauses, employers have no choice but to embrace a more nuanced and bespoke approach when protecting their interests. With impetus from the UK and the US, a turning point has been reached with a move balanced and dynamic employment landscape forming in its wake. No longer will the flow of talent and ideas be restricted. In fact, it will be encouraged – and that is positive step forward for any economy.

Hopefully, the non-compete clauses of the past will be replaced with clauses that promote an environment where employers not only protect their businesses but can bolster a more vibrant and competitive economy.

Njeri Wagacha is a partner at Cliffe Dekker Hofmeyr (CDH) Kenya