Proposals to limit non-compete clauses

The Government has recently announced its intention to introduce new legislation to restrict the duration of non-compete clauses to three months.

What are non-compete clauses?

Non-compete clauses are a type of restrictive covenant, often found in employment contracts, which prevent an ex-employee from joining a competitor business for a specific period of time. Usually, they last for up to 12 months from termination of employment, but in some unique cases could last a number of years.

This recent announcement by the Government comes as part of their formal response to a consultation launched in December 2020 regarding these types of clauses in employment contracts. The consultation had offered two options for consideration, including making non-complete clauses unenforceable altogether, but the government has since decided on this alternative approach.

Non-compete clauses are often considered to be controversial, because depending on the industry of the individual concerned, ex-employees could be stopped from being able to work and indeed use their particular skill for a length of time. With this in mind, the Government’s report on non-complete clauses explained that their intention is to make it easier for individuals to start new businesses, find new work, and apply their skills to continue to drive economic growth.

What benefits will restrictions to non-compete clauses bring?

The Government have also justified their recent proposal by stating that the three-month restriction will boost flexibility and dynamism in the labour market. However, the Government’s proposal might be of concern to some employers. Non-compete clauses are used to protect confidential information, such as know-how and trade secrets, and to protect third party interests. If these are now set to be limited in time by legislation, employers will have to consider how else they can adequately protect themselves from the threat of competition by an ex-employee who knows the business inside out.

Ultimately, the proposed legislation will bring the UK’s response to non-compete clauses in line with other jurisdictions, and non-compete clauses that are less than three months will still be subject to the current rules on enforceability. It is not the case that non-compete clauses of less than three months will be automatically enforceable.

To enforce a restrictive covenant within an employment contract, an employer must firstly demonstrate that the clause protects one of its legitimate business interests. The employer must also show that the non-compete clause is reasonable, and only goes so far as is necessary to protect the legitimate business interest identified. Employers must consider these factors when drafting non-compete clauses, to ensure that they are appropriate in length and scope, including the geographical area to which they apply.

The Government has made it clear that the three month period will apply only to non-compete clauses, and not apply to other types of restrictive covenants such as non-solicitation or non-dealing clauses, which restrict employees’ dealings with their former employees’ customers.

At present, it is still open to employers to insert these types of restrictive covenants for longer than three months into an employment contract, as long as the period is deemed to be reasonable in achieving a legitimate business interest.

Further, the three month restriction proposed by the Government will only apply to post-termination covenants, so employers will still be able to restrict activities during paid garden leave or notice periods.

It is unclear as it currently stands whether the three month restriction will apply to non-compete covenants found in other contracts that may contain restrictions on an individual’s ability to compete with a business, such as business sale agreements, consultancy agreements, employee share option schemes or LLP agreements. There are no plans to extend the new arrangements to these types of contracts, and it seems likely that this will continue. It is also unclear at what point this legislation will come into force. The Government’s intention is to pass the proposed legislation ‘when parliamentary time allows’, so it is unlikely that such a change will come into force any time soon.

In the meantime, it will be necessary for employers to think carefully about the drafting of any non-solicitation and non-dealing clauses within employment contracts, to ensure that they adequately protect themselves and their business interests. Businesses might also consider using longer notice periods for key members of staff, and it is likely that there will be a rise in the use of garden leave.