The Government has recently unveiled its intentions to impose a three-month restriction on non-compete clauses within employment contracts. This proposed measure marks a significant departure from the current state of affairs.
Currently, non-compete clauses should be limited to no longer than is necessary to protect the employer’s interests. However, many senior – and no-so-senior executives have a non-compete restriction of six to twelve months. We do not yet know when the new limit will come into force. New legislation will be required “when parliamentary time allows” However, considering the upcoming general election, it remains uncertain whether this can be accomplished before then. We eagerly await further developments.
Some details have been released about how the new limit might operate in practice:
- The three-month limit will apply to non-compete clauses only but not to other post-termination restrictions such as non-solicitation, non-poaching or non-dealing provisions.
- The limit will not affect the ability of employers to keep employees out of the market through a period of garden leave.
- The limit will apply to employment and worker contracts but not in other arrangements such as partnership, LLP or shareholder agreements.
- Once the limit is in force, the usual rules on enforceability will still apply to any non-compete of three months or less, i.e. employers will still need to show the restriction goes no further than necessary to protect a legitimate business interest.
It is not yet clear how the proposed limit will affect existing non-compete clauses which are longer than three months – will they be completely void or will they be potentially enforceable up to the three-month limit? There is no guidance on how the proposed change would affect non-competition provisions in settlement agreements. It is expected that this detail will be set out in draft legislation.
What can employers do now?
- Review your existing employment contracts to ensure provisions on confidentiality, notice, garden leave and other post-termination restrictions are fit for purpose. This may mean considering increasing notice periods for senior or key employees and making sure that they have the right non-solicitation, non-poaching and non-dealing restrictions.
- Review your incentive arrangements, to consider how these can be used to prevent employees leaving for a competitor such as by including non-compete clauses (and other restrictive covenants) as well as mechanisms for incentives to be lost or clawed back if the employee leaves for one.
- Where appropriate, employers may also consider what other restrictions are in place, or could be put in place, in wider arrangements such as LLP agreements or shareholder agreements.
Given the uncertainty around timing, it would seem premature for businesses which currently have longer restrictions to reduce their non-compete restrictions to three months at this stage (although it is always good practice to keep restrictions under review and the proposed limit may be a factor some employers will wish to weigh in the mix).
19th June 2023