As part of its policy paper “smarter regulation to grow the economy” in May 2023, the Government announced plans to limit the length of non-compete clauses in employment contracts to three months. This 3 month cap on non-compete clauses represents a major shift that could see employers making greater use of garden leave clauses and imposing longer notice periods to protect the business’ interests.
This article explains the proposed changes and looks at the potential implications for employers.
What is a non-compete clause?
A non-compete clause is one type of post termination restriction (PTR) , also known as “restrictive covenants” which can be used by employers to restrict employees in their activities after their employment has ended. Broadly, non-compete clauses prevent employees from going and working for a competitor in a certain geographical area for a certain amount of time after their employment has come to an end.
Broadly, non-compete clauses prevent employees from going and working for a competitor in a certain geographical area for a certain amount of time after their employment has come to an end
Case law has determined that post termination restrictions are enforceable only if they are no wider than is reasonable in order to protect the employer’s legitimate business interests, such as protecting confidential information and customer contact details.
Why a 3 month cap on non-compete clauses?
The Government announced their plans to restrict non-compete clauses, some two and a half years after inviting comments on its consultation paper, launched in 2020 which explored multiple options for reforming the law in this area.
The reason behind the Government’s consultation was that it wanted to make it easier for individuals to start new businesses, find new work, and for people to apply their skills to drive economic growth. The Government is hoping that capping non-competes at three months will provide greater flexibility in the current tight labour market conditions, and that the economy will benefit from the wider talent pool.
The proposed reform will apply to employment and worker contracts, meaning that both employees and workers will be affected. Workers being those who are not employees but who work under a contract for services, such as agency workers, and those workers on zero hour contracts etc.
The Government response confirms that legislation will introduce the statutory limit “when parliamentary time allows”. As yet, there is no relevant employment bill currently before parliament, which means that the proposed reform probably has a long legislative journey ahead of it. We wait to see.
3 month cap on non-compete clauses, the impact for employers
The new plans only apply to non-compete clauses, they do not affect other types of restrictive covenants such as non- solicitation clauses, which limit an ex-employees ability to poach clients or colleagues, or non-dealing clauses, which limit an ex-employees ability to have any dealings with previous clients even if the employee is approached by them. It is therefore likely that employers will look to impose or strengthen these, as well as implement other business protection measures.
Employers could start tightening up contractual arrangements, policies and practices, for example increasing notice periods and having longer garden leave periods for both new joiners and existing staff, in order to protect trade secrets and confidential information ending up in the hands of a competitor. So for example, notice periods of 3 or 4 months, combined with a 3 month non-compete clause would allow the business in effect 6 or so months protection.
For client facing employees for example, consider implementing procedures so if one leaves, all of the confidential information regarding the clients or customers that they were looking after doesn’t leave with them. It happens! Helpful measures include restricting the employee-client communication on WhatsApp for example, or providing company phones so that employees do not have client numbers on their personal mobiles. Other practical measures include reminding employees at exit interviews of their ongoing obligations regarding confidential information, and being stringent about recalling all company devices (which may contain confidential information) from the employee on exit. Consider reviewing and tightening up IT security arrangements, such as prohibiting the use of personal email addresses for company business, and using system alerts which flag any unusual copying, printing or downloading activities.
post termination restrictions are enforceable only if they are no wider than is reasonable in order to protect the employer’s legitimate business interests
Remember that even though there will be the new 3 month cap on non compete clauses, this does not mean that non-compete clauses of less than 3 months are automatically enforceable! The existing common law principles of enforceability “just enough to protect the business’ legitimate interests’ will still apply.
To enhance the transparency about non-compete clauses, the Government has confirmed that it will publish guidance on their use and the underlying law. We wait to see what guidance will be given for non-compete clauses already in place that exceed the 3 months. If you need advice and guidance on planning for this change, please do get it in touch.