On 10 May 2023, the UK government announced its intention to legislate to limit the length of non-compete clauses to a maximum of three months.
Announced as part of a number of planned legal reforms [(also see our employment law watch blog on changes to post-Brexit employment legislation)], the proposal is currently light on detail. This blog sets out what we know already, the missing pieces, and our initial thoughts on what the consequences of these reforms may be.
What type of clauses are caught by the announcement? The reforms only apply to non-compete clauses i.e. clauses that seek to prevent an employee from joining a competitor or setting up a rival business for a period of time post termination (commonly somewhere between 6 and 12 months). The reforms don’t extend to other types of clauses including those which stop an employee from soliciting or dealing with clients, or poaching colleagues.
Was this expected? Yes and no. The UK government ran a consultation from December 2020 to February 2021 seeking views on whether to require mandatory compensation in return for non-compete clauses, limit their length or alternatively to ban them altogether, so proposed changes in this area are not entirely unexpected. However, it is fair to say the announcement is rather out of the blue given we have not had any official response to the consultation detailing the information received from that exercise, nor the government’s commentary on the different options, or any detailed rationale for its next steps. This week’s announcement is the first news on reform in over two years, and it is unclear whether we will see a full consultation response in due course to provide more context.
When might the reforms become law? Likely not any time soon (if at all)! All that is said at the moment is that the legislation implementing the changes will be introduced ‘when parliamentary time allows’. An impending general election in 2024 may also change the course of progress.
What is the rationale for the change? On the limited information given, the reforms are framed as being a boost for the UK economy and a positive measure for employees, centring on improving flexibility for employees to be able to move jobs, upskill, and increase their incomes by allowing them much more scope to move to rival businesses, or set up on their own. The reforms are also positioned as positive for employers in providing increased opportunity to recruit talent.
Is this really good news for employers? No doubt, employers will benefit from having less to worry about when wanting to recruit employees who would normally be subject to long and onerous non-compete obligations. Employers will also save costs in industries where employees expect to be compensated by their new employer for periods out of the market due to non-competes. However, of course, employers wear two hats and while many may find the change beneficial from a recruitment perspective, limiting the length of non-competes may hamper employee retention and will significantly weaken a key tool currently used to protect business interests.
How will employers enforce shorter non-compete clauses? This will be tricky – the usual remedy for employers faced with employees in apparent breach is to seek injunctive relief. Whilst an interim injunction can be obtained swiftly, the litigation process is nevertheless time consuming and expensive, particularly if the dispute proceeds to a final trial which would typically take up most, if not all, of the three month restriction period. Where the length of protection available is short, the benefits of litigating over whether the non-compete is enforceable become more questionable for all parties and that dynamic will no doubt also influence parties’ positions in pre-action negotiations.
What other options are available to employers? If non-compete clauses are limited to three months, employers will need to consider other ways to protect their business where employees pose business risk if they move to a competitor.
The announcement explicitly says that the reforms will not affect an employer’s use of notice periods or gardening leave, both of which are mechanisms to keep an employee in employment (and bound by their obligations as an employee) until the period has expired. As a result, we may see increased use of these contractual provisions as an alternative to a non-compete clause, although as employers are required to continue paying employees during their notice and garden leave periods, they will essentially be paying for the protection they might otherwise have got from a non-compete clause where commonly no continuing payment is made by the former employer.
The announcement also explicitly says that the reforms will not interfere with the use of non-solicitation clauses, although is silent on non-dealing and non-poaching restrictions which are also commonplace. Presumably enforcement of these type of restrictions will remain subject to the current law and getting the drafting of them (and confidentiality clauses) right will take on greater importance.
Will three month long non-compete clause always be enforceable? We have no detail on the enforceability rules under the proposed reform. It seems illogical that, post reform, they will be enforceable in circumstances where the existing law would render them void for reasons not connected to their duration. However, in reality, where it would be usual to include a non-compete for a particular role there will likely be significantly less scope to attack their enforceability.
What about existing contracts where longer non-competes are in place? It is currently unknown whether the reforms will only affect new contracts, or whether it will apply retrospectively. It is also unclear whether, if it does apply retrospectively, existing longer restrictions will be immediately void, or automatically reduced to the three month maximum period. Employers will need to reconsider their contractual arrangements generally in this area, and be ready to enter into new contracts with existing staff where they want compliant non-compete clauses, and potentially longer notice periods. They will also need to be prepared for employees to resist the changes and to provide for enough time and process to make the desired alterations.
What should employers be doing now? Reducing non-competes and increasing notice periods in contracts is likely premature given there are no guarantees this change will come into law and, if it does, when. However, in the meantime, employers would be wise to ensure their confidentiality clauses and non-solicit / deal / poach restrictions are tightly drafted. The potential for shorter non-competes to impact on the viability of commencing injunctive relief proceedings, means it also becomes more important for employers to find out as early as possible where an employee intends to go when their employment ends, so they have time to take enforcement action in advance. Contractual provisions providing an obligation on an employee to share such information could be added to contracts to bolster protection and knowledge.