Exclusivity clauses in employment contracts

    Exclusivity Clauses in Employment Contracts

    IN THIS ARTICLE

    As the cost of living bites, employees may be looking to take on secondary employment. Employers, on the other hand, may be concerned that secondary employment may affect workers’ performance and availability.

    Ensuring that staff are available for work, and unable to work for someone else, can often be key to running an effective business. Still, where the scales are tipped too far in favour of the employer, this can start to impact recruitment and retention rates. After all, employees who are precluded from working for anyone else may not be prepared to work for an employer from whom they are unable to earn a decent living. It can also be unlawful in certain scenarios.

    In this guide to exclusivity clauses, we explain how these types of clauses can be used and when these are legally enforceable. We also examine when exclusivity clauses should be used in the context of pending reforms, providing best practice advice for employers when using an exclusivity clause in employment contract scenarios moving forward.

    What is an exclusivity clause?

    By definition, in the context of employment contracts, an exclusivity clause is any term by which an individual is prohibited or restricted from doing any work other than what is under their contract of employment. An exclusivity clause in a contract of employment is essentially designed to prevent workers from taking on additional work with other employers, where a person will be contractually prohibited or restricted from finding work elsewhere.

    The concept behind exclusivity clauses is relatively simple: as an employer, you will want to ensure that your staff are available to undertake their employment duties when you need them to do so. You may also want the option to prevent that employee from working for others, including but not limited to your competitors, in this way controlling whether they are able to work for another employer outside of their working hours.

    There are good reasons for doing this, from wanting to know that your employee is available and focused entirely on your business, or not competing directly with your business interests, to a need to ensure that your staff receive adequate rest under the Working Time Regulations.

    What are examples of exclusivity clauses?

    The wording of exclusivity clauses may vary depending on the industry role and restrictions sought, although common examples of these types of contractual provisions include:

    • Example one: “You shall be employed solely by [company name] and must carry out the duties highlighted under your job description. You shall neither directly or indirectly render services of a business nature to any other person or organisation”.
    • Example two: “During your term of employment with [company name] you shall devote your full working time to the business of the company. You may not directly or indirectly engage in any activity competitive with the company’s business interests”.
    • Example three: “By signing this contract you agree that during your employment with us you will not render services for any third party, or for your personal account, that conflicts with your duties to the business. You must adhere to this during your period of employment and within a further six months after it ends”.

    Are exclusivity clauses legally enforceable?

    In 2015, legislation was introduced by the UK government to ban exclusivity clauses in zero hours contracts, based on the rationale that using these types of clauses when work is not guaranteed by the employer is fundamentally wrong. This is because the clause would prevent someone from looking for additional work elsewhere to boost their income, even if they were not earning enough money to live on from their current employer. The mechanism of the ban is therefore to make exclusivity clauses unenforceable in any zero hours contracts, meaning employers cannot force workers to comply with such clauses.

    The legislation making exclusivity clauses unenforceable also gives zero hours employees the right not to be unfairly dismissed, for which no qualifying period is required, and zero-hours workers the right not to be subjected to any detriment at work for failing to comply with a purported exclusivity clause. By providing a means of redress for workers if an employer fails to comply with the ban on exclusivity clauses, this allows an individual to take their case to an employment tribunal, which can then award them compensation.

    However, even though exclusivity clauses have been prohibited in the employment contracts for zero hours workers for some time now, it is still not uncommon for these clauses to be used for workers whose role guarantees a minimum number of hours or pay. In fact, the use of an exclusivity clause in employment contracts across various different industries and job roles remains common practice — and legally enforceable, at least for the time being.

    Is the ban on exclusivity clauses being widened?

    In December 2020, the government launched a consultation on measures to extend the ban on exclusivity clauses from zero hours contract workers to other low-income workers, in this way trying to maximise opportunities for anyone in the UK on a very low, and unliveable wage, to find additional work in a difficult post-pandemic economy.

    In particular, the government consultation sought views on the proposal to make exclusivity clauses unenforceable in contracts where a workers guaranteed weekly income is less than the Lower Earnings Limit (LEL). The LEL is the level of earnings which every employee must reach in order to gain entitlement to any contributory benefits, such as State Pension. When the consultation was conducted, the LEL for 2021/22 was set at £120 per week, while the LEL is currently set at £123 per week for 2022/23. According to the government report, an estimated 1.5 million workers received a weekly wage below the LEL in their main job.

    In a May 2022 press release from the government, it was confirmed that legislation proposing to widen this ban to low-income workers — where their guaranteed weekly income is below or equivalent to the current LEL — will be laid before Parliament later this year. It was also reported that 80% of those who responded to the consultation said that they agreed the ban on exclusivity clauses should be extended in this way.  Additionally, the reforms will extend the right of employees not to be unfairly dismissed, and the right of workers not to be subjected to a detriment for failing to comply with an exclusivity clause.

    Extending the ban on exclusivity clauses to those earning below the LEL will mean that these employees will no longer need to rely on their primary employer to supplement their income. The decision to extend the ban on exclusivity clauses will ensure that workers falling into this low income group, and that are restricted by such clauses, have the freedom to source additional work from other employers and the flexibility to top up their income. The reality is that thousands of workers, such as those on short hours contracts, who might otherwise be required to be available to work additional hours over those they are contracted for, but not guaranteed any extra work, will benefit from the change in law.

    The change, once implemented, will mean that employers will no longer be able to prevent employee’s who earn below the lower earnings threshold from obtaining other employment, and any exclusivity clause within their contract will be void. However, as well as supporting workers to increase their income, the reforms will also benefit businesses across the UK by widening the talent pool of job applicants to those who may have previously been prevented from applying for roles due to an exclusivity clause with another employer.

    Legal considerations when using exclusivity clauses

    It is clear how exclusivity clauses can negatively impact low-paid workers, trapping them in low paid jobs or with low hours of work, without the flexibility to top up their income with an additional job if they so choose. On any view this is demonstrably unfair. However, where workers are guaranteed a liveable income or sufficient minimum hours, there are good reasons why an employer may want to use an exclusivity clause in employment contracts.

    Exclusivity clauses give employers the confidence to retain and hire, knowing that their workforce is focused only on their business. It can also help an employer to comply with its statutory duties under the Working Time Regulations, where workers must not work more than 48 hours a week on average, unless they have opted out of the maximum weekly limit, and they must take adequate daily and weekly rest breaks for health and safety reasons. Exclusivity clauses can therefore be an effective way of protecting your business interests.

    Still, even where there are legitimate business reasons for including and enforcing an exclusivity clause in employment contracts, you should always first assess what alternative steps can be taken to meet your operational needs. You should also ensure that the potential power imbalance created by making your staff reliant on you as a single employer is redressed through a minimum guaranteed income and number of hours.

    However, despite the fact that a significant proportion of those who responded to the Government consultation advocated for a general ban on exclusivity clauses unless an employer could show they had a legitimate business reason for enforcing it, such as as protecting intellectual property rights or confidential information, this is not something currently on the horizon. The government chose instead to prioritise those in insecure employment, in this way helping individuals hit hardest by the pandemic.

    The legal position is therefore this: exclusivity clauses can continue to be used, and will be legally enforceable, save except where someone is on a zero hours contract and, in due course, where their guaranteed weekly income is equal to or less than the current LEL. If you currently have workers, for example, earning less than the LEL, working under a contractual provision that prevents them from working for someone else, once the extended ban on exclusivity clauses comes into effect, these provisions will no longer be enforceable.

    Equally, it is important that for those workers for whom an exclusivity clause can be lawfully used, the wording of that clause is sufficiently reasonable in scope so as to be enforceable. An exclusivity clause is essentially a restrictive covenant, restricting or prohibiting a person from working for another employer. As with other restrictive covenants, these are only enforceable if they are designed to protect a legitimate business interest and are reasonable in scope. This means that even if an employee has agreed to work subject to a covenant which restricts or prevents them from working for someone else, it must not be more than is reasonably necessary for the protection of your legitimate business interests.

    An ideal way to get around any legal risk around the scope of exclusivity clauses is to ensure that the clause is widely drafted so as to simply prevent an employee from undertaking other work ‘without the consent of the employer’. This will enable you and your employee to reach an agreement about the other work the employee would like to do whilst employed by you, where appropriate, and provided you do not unreasonably withhold consent, this type of clause is unlikely to cause any problems. By providing your staff with the opportunity to discuss with you any other work that they may wish to do to top up their income, this will also help to create a positive working environment where the employee feels confident in keeping you informed and still committed to the success of your business.

    Best practice guidance when using exclusivity clauses?

    When using exclusivity clauses in employment contracts, it is important to know how to avoid the most common pitfalls, ensuring that these contractual provisions are both reasonable and enforceable, and that you do not fall foul of the law.

    It’s always best to seek advice from a legal expert when it comes to restrictive covenants, although the following best practice “do’s and don’ts” provide a good starting point:

    • do provide employees with the right to discuss with you any other work
    • do respect the right of your staff to earn a decent living

    AND;

    • do not unreasonably refuse consent if an employee is seeking a second job
    • do not seek to use exclusivity clauses where workers guaranteed weekly income is more than the LEL or penalise these workers for asserting their rights to work for someone else.

    Certificate of Sponsorship FAQs

    [wp-faq-schema accordion=1]

    Legal disclaimer

    The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal advice, nor is it a complete or authoritative statement of the law, and should not be treated as such. Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission. Before acting on any of the information contained herein, expert legal advice should be sought.

     

     

     

     

     

     

     

     

    Author

    Gill Laing is a qualified Legal Researcher & Analyst with niche specialisms in Law, Tax, Human Resources, Immigration & Employment Law.

    Gill is a Multiple Business Owner and the Managing Director of Prof Services - a Marketing & Content Agency for the Professional Services Sector.

    Provision criterion or practice

    Subscribe to our newsletter

    Filled with practical insights, news and trends, you can stay informed and be inspired to take your business forward with energy and confidence.