UK employment law update – a shiny new act in time for Christmas, and a fresh consultation on the future of non-compete clauses

Employment Rights Act

This week, news arrived that the protracted ping pong had ended, and the Employment Rights Act 2025 was finally passed into law. With the House of Lords and the House of Commons at loggerheads, it had looked increasingly unlikely that the bill would be passed this year, placing the government’s implementation roadmap in jeopardy. However, on Tuesday, shortly before the parliamentary Christmas recess, the House of Lords finally agreed to the government’s proposals, paving the way for the legislation to receive royal assent.

Of course, the story is far from over, and the coming year will be busy with consultations, as we see aspects of the act take further shape. One of the major sticking points over the last couple of weeks has been the government’s eleventh-hour proposal that the cap on unfair dismissal confirmation be lifted – not simply, as was initially suspected, a lifting of the 52-week cap – but rather the removal of the cap altogether, which as at April 2025 stands at £118,223.

Many were expecting the government to concede that there should be a consultation over the cap. However, after the last-minute climbdown by the House of Lords, no consultation will now take place, although an impact assessment on the whole of the act, including the unfair dismissal cap, will be published shortly.

Time will tell whether pressure from employers’ organisations, plus the further strain that unlimited unfair dismissal compensation will place on an already creaking tribunal system, will lead to a watering-down of this change; however, for now, the position is clear – there will be no cap on unfair dismissal compensation. What is not clear is when this change will take place. Some commentators have suggested it may come into force on 1 January 2027, along with the reduction in the qualifying period from two years to six months.

Consultation on non-compete clauses

Away from the Employment Rights Act, we have a blast from the past – a resurfacing of the previous government’s review of post-termination non-compete clauses. The 2023 review recommended that non-compete clauses should be limited to three months’ duration. Then came the election and the proposals went no further… until now.

On 26 November, the Labour government published a consultation paper setting out options for restricting these clauses by:

• limiting their length;
• limiting them by company size – permitted for smaller companies only;
• banning them altogether (as is the case in California);
• allowing them only for higher paid employees, ie those who are more likely to hold highly sensitive confidential information; and
• combining a ban below a salary threshold with a statutory limit of three months’ duration.

The government is eager for growth and is looking to the science/tech sector in particular. It promised to pull the UK ahead by growing the economy but has had an uncomfortable first year. Its argument for limiting covenants is that doing so will boost labour market dynamism by allowing workers to move jobs or build their own start-up businesses. Companies at critical stages of growth must be able to access the talent they need. Enabling that will promote competition and innovation from entrepreneurs.

The consultation paper recognises that against these arguments is a company’s need to protect its confidential information so that it is able to recruit and grow. For this reason, limiting the use of restrictive covenants to smaller companies would allow for protection at the early stages of growth but, once well established, a company would be expected to weather the disruption naturally caused by staff moves.

The consultation is at an early stage, and only time will tell how these proposals will play out. What seems likely, however, is that:

• the fact that the current government has picked up on this issue (left over from the previous government) means there is some will to make a change;
•  there will be a restriction on the length of non-compete provisions, to three or six months, and they will be permitted for senior staff only;
•  this change will not take place any time soon – the government has enough on its plate;
• any change will affect only ‘non-competes’: the restriction will not extend to non-solicitation or non-dealing clauses. However, as the consultation paper recognises, an extensive prohibition on client solicitation and client dealing, could, in certain industries, amount to the same thing;
• even where permitted, restrictive covenants will only be enforceable to the extent they are reasonable and protect a legitimate business interest of the employer.

Interestingly, the government does not appear to be considering the option of an employer paying the employee for the length of the non-compete, which was one of the proposals made by the previous government.

As always, the strongest protection for a company will be garden leave, where the departing senior employee remains employed and subject to a duty of fidelity, but unable to interact with clients. Solid confidentiality clauses will also be key, ideally ones written in clear English that identify the confidential information, as opposed to a ten-line sentence cobbled together from various precedents, that does not relate to the company’s business.

The consultation hints that restrictions on equity vesting might not fall under the prohibition. If a company can restrict the vesting of equity based on competition, that will still fall under the normal rules of reasonableness/legitimate interest. It may be worth considering an element of vesting that does not cease on termination but is subject to non-competition. This is very common in the USA.

Employers who have strong views on any of these options may wish to participate in the consultation, which closes on 18 February 2026. The consultation paper can be found here.

It is clear that 2026 will be a massive year in the field of employment law. We will continue to keep you up to date on all developments, including in relation to the consultation on non-competes, and the progress of the new Employment Rights Act. In the meantime, for any queries, please contact Paul Mander, Tom Walker or your usual contact in the Penningtons Manches Cooper employment team.