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What is the future of non-compete clauses in employment contracts?

What is the future of non-compete clauses in employment contracts?

A non-compete clause in an employment contract is a clause which seeks to prevent a departing employee working for a competing business for a limited period of time.

It is generally regarded as more restrictive than other post termination restrictions, such as those prohibiting the solicitation of the employer's customers or senior staff, because it seeks to limit who the departing employee can work for.

In 2016 the government consulted as to whether such clauses reduced innovation and entrepreneurship, and as such, whether they should be restricted in their use.

There was a general consensus in the responses that such restrictions were valuable, and necessary for employers to protect their legitimate business interests.

Following the significant impact of the pandemic the government has been considering measures to boost innovation. As such, non-compete clauses have again come under scrutiny.

In December 2020 a new consultation began as to whether the use of non-compete clauses should be restricted, in the hope that this might maximise the opportunities for people to start new businesses and find new employment. In particular, the consultation was to consider whether there should be mandatory compensation paid by the employer to the employee in return for a non-compete clause, or whether such clauses should be made unlawful.

In May 2023 the government set out the measures it intends to take. Neither of the suggested reforms mentioned above are to be adopted. Instead, the government has confirmed it intends to limit non-compete clauses in employment contracts to 3 months.

The government concluded that "under current common law, there are very few constraints on the use of non-compete clauses in employment contracts". For this reason, the government was satisfied that there was a case for reform.

The government has confirmed that it will produce guidance on non-compete clauses. The intention is that this will raise awareness in relation to such clauses. We will endeavour to let you know once that guidance is published.

The government has described the introduction of a 3 month limit relating to non-compete clauses as "bold action" in an effort to increase flexibility, recruitment and access to talent.

The government noted that the average duration of a non-compete clause is 6 months, and therefore considered that a limit of 3 months would reduce the existing typical restriction, while still allowing employers to impose some restriction, where legitimate business need dictates.

It should be noted that the 3 month limit will apply only to non-compete restrictions. Is will not apply to restrictions prohibiting solicitation of customers, dealing with customers, and poaching of staff. The rationale for this is that such restrictions have a much smaller impact on what a departing employee can do for the reasons explained above.

The government's own impact assessment acknowledges, amongst other things, that this change could have a cost to employers, including loss of trade secrets, client relationships and confidential information.

There is currently no timeframe as to when this change will apply. It will require an Act of Parliament. The only indication from the government as to when this might happen thus far is "when Parliamentary time allows".

It is possible that employers will seek to use alternative protections including longer notice periods, more use of garden leave, other restrictions, or litigation in relation to confidentiality clauses.

There is no guidance yet in relation to what will happen, as and when the law changes, in relation to existing non-compete clauses which extend beyond 3 months. Under current common law principles, generally speaking if a restriction is longer than a court considers reasonable, the period of restriction is not reduced, but rather the restriction is void. We would have thought that any legislation enacted to implement this change will deal with this point, and may well indicate that any restriction which is longer than 3 months shall be deemed to last for 3 months only. However, if that is not what is provided for in the legislation, employers may need to redraft existing contracts that contain non-compete clauses, in order to avoid losing protection altogether.

Further information can be found in the Department for Business and Trade section of GOV.UK website (Consultation Outcome - Measures to Reform Post-termination Non-compete Clauses in Contracts of Employment).

We will endeavour to keep you informed of any developments.

This is not legal advice; it is intended to provide information of general interest about current legal issues.

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