Last month, the government announced its intention to limit the length of non-compete clauses to a maximum of three months. This was announced with several other legal reforms. Currently, the proposal is light on detail, however, we have explored how the reforming of non-compete clauses may affect employers.
What does this change mean?
Currently, employers can include post-termination restrictions in employment contracts and other documents. Amongst these are non-compete clauses, which are contractual clauses that prevent an employee from entering into an employment agreement with a competing employer once the employment terminates. They are usually for a period of between three and twelve months, and are enforceable where they go no further than necessary to protect a legitimate business interest, for example goodwill. The government’s proposed changes relate specifically to non-compete clauses, thus limiting these kinds of clauses to a maximum of three months after termination of employment. This will provide employees with more flexibility to join a competitor or commence a rival business once they have left employment.
When will this change be introduced?
The change is not likely to be introduced anytime soon. The only guidance given is that it will be ‘when parliamentary time allows.’
How will limiting non-compete clauses affect employers?
The government believes that the change will support employers’ business by widening the talent pool, thus boosting the UK economy. It is likely that employers will benefit when recruiting employees who would normally be subject to long and onerous non-compete obligations. However, limiting the length of such clauses will undoubtedly significantly weaken a key tool which is used to protect business interests.
How can employers protect their business interests?
If employers are obliged to limit non-compete clauses to three months, they may consider alternative ways to protect their business where their employees may move to work for a competitor. The announcement expressly states that the reforms will not affect notice periods or gardening leave, both of which are ways of keeping an employee in employment and bound by the employer’s obligations until the period has expired. Therefore, employers may make increased use of these contractual provisions as an alternative to non-compete clauses. Employers may also use other types of restrictive covenants, such as non-solicitation clauses, perhaps in addition to non-compete clauses of up to three months. For further information click here.
Will this affect existing contracts where longer non-compete clauses are in place?
We do not currently have information on whether the reforms will only affect new contracts, or if they will be applied retrospectively. If applied retrospectively, there is further uncertainty regarding whether existing restrictions will be unenforceable or automatically reduced to the three-month rule.
What should employers do now?
If the reform is implemented, it will likely impact the length of notice periods, and the use of garden leave, which will mean that employees will be paid while being kept out of the market. At the moment however, no one is quite sure whether introducing post-termination restrictions will be a boost to innovation or a hindrance.
For now, it may be too early for employers to reduce non-compete clauses and increase notice periods in contracts as there are no guarantees that this limit will become law, and even if it does, we do not know when this might happen and what its effects may be. However, it is sensible for employers to ensure that any confidentiality clauses and non-solicit/deal/poach restrictions are tightly drafted.
