Non-compete clauses in the UK currently have no statutory limits and the principles of enforceability are derived from case-law. Driven by a desire to enhance worker mobility, innovation, growth and competition in the UK market, the Government is now seeking to change this with a bold step of introducing a new 3-month limit on non-compete clauses.
Following our post last week, the Government has now published its ‘Response to the Government consultation on measures to reform post-termination non-compete clauses in contracts of employment.’ The Response provides some important details on how the reforms will work, but still leaves crucial details unanswered.
What details do we now know?
- The cap will have a limited remit. It will only apply to non-compete clauses in contracts of employment and worker contracts (specifically limb b workers).
- The reforms will not apply to non-compete clauses used in wider contracts such as partnership agreements, LLP agreements and shareholder agreements, where it is suggested the balance of bargaining power may be different.
- The reforms will only apply to non-compete clauses and not other restrictive covenants: For example, the other most commonly used restrictions like non-dealing clauses (used to prevent a departing employee from having ‘dealings’ with clients of the former employer for a specified period after they have left) and non-solicitation clauses (used to prevent clients being poached) will not be capped and the current common law principles of enforceability based on reasonableness will continue to apply.
- Likewise, the Government intends that the existing common law principles of enforceability will continue to apply to non-competes of up to 3 months. The starting point being that restraints of trade are unenforceable unless they are shown to be reasonable going no further than necessary to protect legitimate business interests.
- The reforms do not contain any restrictions on how employers may respond to the limit by utilising other business protections available (more below on this).
- The Government will enhance transparency by producing guidance on non-compete clauses.
What don’t we know?
- Firstly, when these changes will be implemented. This depends on when “parliamentary time allows”. Whether these changes will actually go through before the next general election depends on how much of a priority these changes are for the existing government. Employers may want to hold off taking any steps until there is greater clarity on this, but be ready to act swiftly to make necessary changes to existing contracts and contracts for new joiners once as we know more.
- Whether garden leave periods will be off-set against the 3-month limit on the non-compete or if it is envisaged that garden leave can be uncapped with up to 3 months’ non-compete on top?
- Whether employers are expected to update their contracts which contain non-competes exceeding 3 months or if the Government will facilitate a less cumbersome process.
- What the expectation is for employers who want to beef up their other contractual terms to plug the gap created by the 3-month limit on the non-compete?
- Whether or not the reforms will apply retrospectively to existing non-competes. Will they be void completely or only enforceable up to 3 months? What about restrictions which are already part-way through?
What should employers be thinking about?
Employers who currently have longer non-competes are likely to want to find other ways of protecting their business and may seek to push through other changes in their contracts.
Many employers for whom it is financially viable, may already be considering increasing notice periods and enhancing their garden leave provisions to keep their highly skilled and sought-after personnel out of the competitive market for longer. This then starts to look a lot like the first (rejected) proposal of mandatory compensation for the duration of the non-compete which the Government said it wasn’t going to introduce.
Whilst this means employees will be paid for the duration of the extended garden leave, it may also have unintended consequences.
Typically, during garden leave, because the individual is still employed, they are even more restricted in the activities they are allowed to do than if they were just subject to a non-compete, for example there might be limits on who they can communicate with, where they can go, being available at all times, and, crucially, are normally prohibited from doing any work at all, competitive or not. If employers seek to extend garden leave periods to cover the period lost by the curtailed non-compete this could have a worryingly detrimental impact on individuals who may see their skills atrophy over time and their mental health decline as they are kept in the garden unable to put their professional skills to use and kept away from communicating with and seeing their colleagues and clients. Ongoing implied duties of fidelity and good faith would also continue, which may limit the preparatory steps the individual can take to plan for and advance their next job or business venture. Again, these don’t usually apply to a former employee subject to only to their post termination restrictions.
Whilst this might only impact business who can afford to pay extended notice periods for staff not contributing to the business, one can see how this might actually operate to the detriment of the Government’s stated objectives of innovation and stagnate competition if those highly skilled workers are sat for long periods of time not working at all. One can also imagine damage to an individual’s employability once they emerge from the garden.
Could this result in a need for further reforms to regulate the use of garden leave (beyond the established restraint of trade principles)? Will departing employees look for ways to escape their contracts sooner and avoid lengthy periods in the garden? Might employees decide they are better off leaving in breach of contract than sitting for extended periods on garden leave and find ways to assert constructive dismissal or knowingly breach their contract and get their new employer to make up the shortfall of any remuneration and benefits which have been forfeited or lost. Could this spark ancillary litigation, think economic torts, inducement and the like?
Furthermore, we predict businesses will also look to make increased use of these other contractual arrangements to implement longer non-compete restrictions or protect their businesses. For example, more reliance on other restrictive covenants, such as non-solicitation or non-dealing clauses, enhance their confidentiality and intellectual property protections or make use of deferred benefits for example by removing deferred compensation and benefits from employees who leave and join a competitor or even looking to provide for limiting remuneration and benefits during garden leave.
Employers may also want to make use of other business protection restrictions in agreements outside of the employment contract, for example shareholder agreements, long -term incentive plans, options schemes and even a potential shift to a different contractual arrangement such as Limited Liability partnership (LLPs), which won’t be caught by the reform on non-competes.
With so many issues yet to be addressed, there is still a lot of thinking to be done and more practical guidance is certainly needed if these are to be implemented.