On 10 May 2023, the UK government announced that it will be introducing legislation to limit the length of non-compete restrictions to three months in a bid to boost competition and innovation.
This announcement follows similar proposals in the US, where the FTC is considering a ban of such restraints, and proposals from the Dutch government to restrict the use of non-competes, as a global trend towards reconsidering their use in the labour market gains momentum.
However, the approach proposed by the UK government is significantly stricter than that at an EU level (where there are currently no restrictions on non-competes) and in Member States (where limits on duration range from six months to five years).
Despite the magnitude of the government’s proposal, there remains a number of unanswered questions for employers to grapple with until such time as guidance or draft legislation is published.
What do the proposals say?
This is what we know so far:
- On timing, the government has committed to legislating “when parliamentary time allows”. From previous experience of similar announcements on other employment reform, we shouldn’t expect any changes imminently and it could in fact take a number of years (or be dropped altogether). However, this is a topic that the government has revisited on a number of occasions (having considered the position in a Call for Evidence in 2016 and then again in a consultation in 2020), so it is undoubtedly a key area of focus.
- The reforms will not affect employers’ ability to use paid notice periods and garden leave, and employers will still be able to rely on longer non-solicitation clauses and confidentiality provisions.
- The three-month limit will only apply to non-competes that are contained within contracts of employment and worker contracts. It will not apply to wider workplace contracts such as partnership agreements, LLP agreements and shareholder agreements.
- The starting point will still be that restraints of trade are unenforceable unless they can be shown to go no further than is reasonably necessary to protect a legitimate business interest i.e. they won’t automatically be enforceable because they are limited to three months.
What do the proposals not say?
However, the proposal leaves many questions unanswered:
- It is not clear how the changes will affect non-compete clauses entered into before the legislation comes into effect. We expect that the proposals will have retrospective effect, meaning that it will affect existing arrangements with current employees, but how will non-competes of over three months be treated? Will they be void in their entirety? Will they be unenforceable beyond three months? Or will courts be directed not to exercise their discretion to enforce them? Further clarification is awaited on this.
- Tension arises from the government’s proposal to exclude ‘wider workplace contracts’ such as LLP agreements. Excluding these types of contracts means that businesses may still be able to restrain individuals for longer than three months by including non-competes within these types of agreements. However, the case of Bates van Winkelhof v Clyde & Co LLP confirms that LLP members can be workers, so it is unclear how this distinction will be addressed.
- It is also not yet clear how settlement agreements will be treated and whether employers will be able to include enforceable longer non-competes within them. Nonetheless, it is likely that courts will be alive to attempts to undermine the public policy of the legislation by putting longer non-competes in other types of agreements in an attempt to avoid the cap.
- There is no indication about how non-compete clauses will be defined. As the government has confirmed that the three-month limit will not apply to other types of restrictive covenant, it is unclear how the new legislation will deal with non-competes that might be disguised as longer non-solicit or non-dealing provisions. This will need to be appropriately addressed to avoid the risk of longer non-competes getting into contracts through the back door. It remains to be seen what (if any) anti-avoidance measures there will be in the draft legislation.
Preparing for change
Given the commercial value parties place on non-competes, many organisations may now be concerned about how they can adequately protect their business interests once (or if) the new rules come into force. Employers may wish to consider how they can bolster their broader suite of contractual protections:
- Garden leave: Employers may wish to consider whether the length is sufficient and/or whether provisions off-setting the time an employee spends on garden leave against their post-termination restrictions should be removed. However, note that lengthy express garden leave provisions can still be challenged by employees in the courts as restraints of trade so it is important to exercise caution in relation to this.
- Notice: Employers may wish to extend and rely on notice periods rather than making payments in lieu of notice as an additional way of protecting their legitimate interests.
- Confidential information: Employers may wish to consider tailoring the definition of confidential information to ensure it is sufficiently wide to catch information that the employee is likely to create or access while employed, and to deal with the position on termination (i.e. the return or deletion of confidential information).
- Job notification clauses: Clauses requiring employees to disclose approaches and/or offers from competitors and requiring employees to give potential employers a copy of their restrictive covenants could be included in contracts. This allows an employer to assess at an early stage the potential damage that could be caused to its business (and whether action is necessary), as well as increasing the chance of a successful claim against the new employer for inducing breach of contract.
If introduced, the limit will inevitably lead to shifts in contractual arrangements and litigation trends as employers seek to balance protection of their businesses with compliance with the new rules. For example, we could see the focus of disputes and litigation shift to other restrictive covenants and obligations, such as confidentiality and intellectual property provisions, as businesses seek to protect their interests as widely as possible.
If you would like to speak to one of the team, please do get in touch or visit our dedicated webpage.