On 10 May 2023 the UK government published a policy paper Smarter Regulation to Grow the Economy announcing some important changes to employment law. We considered the proposed reform of the Working Time and TUPE Regulations in our earlier blog and now turn to look at the government's plans in relation to non-compete clauses.
What is a non-compete clause, and when is it enforceable?
A non-compete clause seeks to prevent an employee from working in a competitive activity for a specified period after the termination of employment - either in a particular geographical area or business activity, or for specific rival businesses.
A restrictive covenant is only enforceable if it is designed to protect a legitimate business interest (e.g. goodwill or confidential information), and goes no further than is reasonably necessary to protect that interest. Non-compete clauses are often harder to enforce than other types of covenant. It will depend, for example, on whether the restriction can be justified in terms of its length, geographical extent, and how competing business has been defined (for example, is it limited to the goods/services the employee was involved with prior to termination?).
Proposed new 3-month time limit for non-compete clauses
The government consulted on reforming the use of non-compete clauses in 2020. It asked for views on proposals to ban non-compete clauses completely, or introduce a requirement on employers to pay mandatory compensation during the restricted period.
The government has decided not to introduce either of these options (see the policy paper and the government response to the consultation). Instead (i) the length of non-compete clauses is going to be limited to three months; and (ii) guidance on the use of non-compete clauses will be produced.
Employers will still be able to restrict a departing employee's activities for more than three months by using paid garden leave and notice periods, or a different type of restrictive covenant. The government has confirmed that the three-month limit will not apply to non-solicitation clauses (which can prevent an employee from poaching their former employer's clients, suppliers, customers and employees); non-dealing clauses (which prohibit an employee from dealing with their former employer's clients, suppliers and customers); or confidentiality clauses. These clauses (and non-compete clauses lasting up to three months) will continue to be subject to the usual rules on enforceability.
The new restriction will only apply to employment and worker contracts and not to other types of workplace contracts, such as shareholder or partnership agreements.
What does this mean in practice?
The change will be brought into force 'when Parliamentary time allows'. We await the draft legislation for clarity on how it will be enforced in practice. For example, if an existing contract contains a six-month non-compete clause, would it be void or only enforceable for the statutory three-month time limit? Will the new rule apply to all non-compete clauses, or only those entered into after the legislation is in force?
For now, employers should bear the potential change in mind when drafting and reviewing notice periods, garden leave provisions and post-termination restrictions. For each individual employee, consider whether covenants are required and, if so, which type and length of restriction(s) would best protect the business.
If you would like to discuss the potential impact of the proposed change, please get in touch with the Brodies Employment and Immigration team. Workbox by Brodies subscribers can access guidance on restrictive covenants, template clauses plus a What's New? page.