The Future of Non-Compete Clauses

Back in 2020, the UK Government held a consultation on reforming non-compete clauses in employment contracts. There had been little news on what, if any, action was to be taken following this consultation – that was, until 10 May 2023, when the Government published its “Smarter Regulation to Grow the Economy” policy paper, which proposed to limit non-compete clauses to a maximum length of three months. We have addressed this policy paper, and the other changes it proposes, in another article – you can read more here.

Further to this, the Government has finally published its response to the 2020 consultation, which sets out its view on various proposals from consultation respondents.

Ban

The possibility of an outright ban on non-compete clauses was raised during the consultation. It was suggested that such a measure would afford employees greater flexibility to take up new employment, while providing employers with a wider pool from which to select new hires, thereby increasing market mobility. It was also felt that such a change would result in increased wages and further opportunities for career progression – both because employees would have a greater range of alternative employers to pick from, and because current employers would be incentivised to do more to retain their employees.

However, despite these benefits, the Government ultimately took the view that the downsides and risks of a complete ban were too significant. These might include a decreased appetite for training and upskilling workers, on the basis that they could simply leave for a competitor, and a chilling effect on the sharing of information within organisations, for fear that more transient employees might leave and soon after share confidential information with rival businesses.

Three-Month Limit

As set out in the policy paper, the Government will instead introduce a statutory limit of three months on the duration of non-compete clauses in employment and worker contracts. The consultation and further research revealed that the average duration of non-compete clauses is currently six months, although terms can be as long as twenty-four months. The hope is that the three-month limit will therefore have a significant impact on market mobility, while still allowing employers to utilise non-competes where there are legitimate business justifications for doing so.

The Government clarified that the three-month cap shall apply to non-compete clauses only, and not to other post-termination restrictions, such as non-solicitation and non-poaching clauses. While such clauses do still restrict former employees, the consultation indicated that they have a far less significant impact on employees’ ability to earn a living, and therefore do not require legislative intervention.

The Government also confirmed that the three-month restriction will only apply to non-compete clauses included in employment contracts and worker contracts – and not where they are present in wider workplace contracts, such as partnership agreements and shareholder agreements. While the Government noted that non-competes were increasingly common in such wider workplace agreements, it was felt that there would be difficulty in defining such agreements, and that this could simply lead to increased litigation as to when the statutory cap applies.

The Government also flagged the fundamental differences regarding bargaining power between a partnership or shareholder arrangement – where the parties are generally on relatively even footing – and an employment relationship – where the employer can ordinarily dictate most of the terms of the contract. A cap is therefore not as necessary for the former scenarios, where any such non-compete will normally be agreed as part of the usual give-and-take involved in business negotiations.

Mandatory Compensation

Another suggestion was that employers could be required to compensate employees for the period during which they are prohibited from working for a competitor. The Government conceded that this measure would encourage employers to consider whether a non-compete was truly necessary in the circumstances, while also providing some financial stability to employees subject to non-competes.

However, the Government highlighted that such a measure would also impose substantial costs on businesses who rely on non-compete clauses, which would not be appropriate during the UK’s current economic recovery from the COVID-19 pandemic. These costs would be particularly damaging for smaller employers and would therefore provide a competitive advantage to larger businesses, who could afford to impose non-compete clauses on their departing employees.

It was also felt that, because of the financial compensation they would be receiving during the period of the non-compete, employees might be less likely to challenge an unenforceable non-compete, which could in turn having a chilling effect on market mobility – the very thing that the proposed reforms aim to address.

What Does This All Mean?

It remains to be seen when, and indeed whether, this three-month limit will be introduced. The Government has simply said that the relevant legislation will be put before the Commons “when Parliamentary time allows”. It is indeed possible that the Government might be keeping this measure in its back pocket for the next general election – although, from a cynical political perspective, it is unclear whether any positive reaction to this change from workers would outweigh the likely-negative response from business owners.

We also do not yet know whether the cap will affect existing non-compete clauses. Currently, a non-compete which exceeds a “reasonable duration” is entirely void. It is possible that, following the introduction of the cap, all existing non-competes longer than three months will automatically be considered unreasonable and therefore unenforceable. If this were the case, employers would need to redraft and reissue all existing contracts containing non-compete clauses of longer than three months to retain the benefit of those restrictions. Alternatively, existing, otherwise-reasonable, non-compete clauses might be allowed to remain in force, but only up to the three-month time limit, becoming unenforceable thereafter.

Inevitably, employers will look for ways to circumvent the three-month cap and find alternative methods for protecting their business interests. The Government has itself noted that the cap may increase the prevalence of longer notice periods and garden leave, and result in more stringent confidentiality clauses and other post-termination restrictions. Because garden leave prevents employees from working for any new employers, not just competitors, the new regime could end up leaving employees even more restricted than they are currently.

If you would like advice on non-compete clauses and other provisions of your employment contracts, please get in touch at [email protected]