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New three-month limit on non-compete clauses

Posted: 29/08/2023

In its policy paper, titled ‘Smarter regulation to grow the economy’, the government has announced plans to cap the length of non-compete clauses in employment contracts to three months. Currently, these clauses can be quite lengthy, sometimes lasting beyond 12 months.

However, there is no current timeframe given by the government as to when this change will become law. The government has indicated that the primary legislation needed to implement the cap will be introduced ‘when Parliamentary time allows’. Indeed, there is speculation as to whether the government intends to push forward this policy in the lead-up to the next general election.

Additionally, it is not clear how this change will apply to existing non-compete clauses which exceed three months – whether they would be void in their entirety or whether an employer could only enforce them up to the cap. If it is the former and your contract contains a non-compete clause longer than three months, it would mean that you would no longer be bound by the restriction once the cap is introduced, unless your employer takes steps to redraft the clause and requires you to enter into the new shorter clause prior to the cap taking effect.

If your employer does not take such steps, this may indicate that the company never intended to enforce the restriction in the first place, and requiring you to enter into it when you signed your contract may simply have been a tactical step to discourage you from joining a competitor after your employment ended.

Under current common law principles, a non-compete which exceeds a reasonable duration would be void in its entirety, meaning your employer could not rely on it even if you had agreed to work under such terms. The term ‘reasonable duration’ is very much dependent on the circumstances, taking into account your level of seniority within the organisation, your level of exposure to confidential information as part of your job role, etc. As such, a non-compete which exceeds three months' duration may still be enforceable if it goes no further than necessary to protect an employer's legitimate business interests.

Other jurisdictions

In the United States, it is common to compensate the departing employee for entering into a non-compete clause, though the rules on enforceability vary from state to state. Compensation was indeed one of the two proposals considered by the UK government as part of its consultation in 2020 on measures to reform post-termination non-compete clauses in contracts of employment, the other being to ban non-complete clauses in employment contracts altogether. The government found that the introduction of mandatory compensation would involve too much of a direct cost for employers, and that the blanket nature of both options could lead to unintended adverse consequences.

However, the United States is also considering taking measures in the form of the latter proposal – on 5 January 2023, the US Federal Trade Commission (FTC) announced its proposal to ban the use of non-compete clauses in employment contracts throughout the United States. The FTC estimated its proposed prohibition on the use of non-competes could increase workers’ collective earnings by as much as $300 billion per year. The proposed rule is a radical departure from historic business practice and even broader than the EU principle of free movement between countries and jobs. Yet it would lack the EU structure that permits non-compete clauses, limited in geography and time, for certain types of employees (for example, senior executives) that are compensated separately (for example, garden-leave). Whether and how the US will follow through with the FTC’s proposal remains to be seen. No doubt the proposal will face strong opposition from many employers across the US.

EU view

As mentioned above, the stance taken in Europe is similar to that of the US, with specific compensation for the employee to enter into a non-compete clause being a mandatory requirement in jurisdictions such as Italy, France, Germany, and Poland. These restrictions are limited in activity and territory as well as time; in Portugal, for example, the legal maximum period of the limitation is two years (three years in cases of jobs of trust or jobs with access to information of particular relevance).

Where can I look to check if I have any restrictive covenants in my employment contract?

Restrictive covenants in English employment contracts are usually found towards the end of the contract and can be quite lengthy, often containing a set of definitions of their own, so make sure not to miss these and gloss over them by accident. There are several types of restrictions, such as:

Non-competition clauses:
Non-competition clauses aim to prevent you from joining or starting a competing business within a specific geographic area and time period after leaving your current employer. The restrictions must be reasonable in scope to be enforceable, considering factors such as your role, the industry's nature, and the company's size.

Non-solicitation clauses:
Non-solicitation clauses prohibit you from soliciting or dealing with your former employer's clients or customers for a set duration. These clauses can be particularly crucial for businesses heavily reliant on maintaining customer relationships.

Non-dealing clauses:
Similar to non-solicitation clauses, non-dealing clauses restrict you from dealing with your former employer's clients or customers should they approach you, even if you have not actively solicited them.

Non-poaching clauses:
Non-poaching clauses prevent you from enticing your former colleagues to leave the company and join a new employer.

Non-disclosure clauses:
Non-disclosure clauses, also known as confidentiality clauses, aim to protect sensitive information, trade secrets, and proprietary knowledge of the employer from being disclosed or used by you as a former employee.

Is the change limited just to employment contracts?

For now, this appears to be the case. In shareholder and partnership agreements, non-compete clauses are often more extensive and robust, sometimes lasting up to 24 months. If the change were to extend to these agreements as well, it would likely pose problems for many companies.

Implications of restrictive covenants

It is worth noting that the government has not announced any changes to the use of garden leave clauses, non-solicitation clauses or confidentiality provisions, and it is expected that these clauses will become even more important as time goes on.

If the cap becomes law, employers will almost certainly look for alternative ways to protect their business interests. This is likely to mean that, on termination of your employment, you might find that your employer decides to put you on garden leave for the full duration of your notice period (if your contract allows it to do so); or, that if you agree to end your employment under a settlement agreement, your employer requires you to enter into other restrictive covenants (such as confidentiality clauses and intellectual property provisions), or may even require you to sign up to longer non-solicitation or non-dealing restrictions.

In seeking and obtaining new employment, the change in the law may mean that a prospective employer will seek to impose a longer notice period in your contract, require you to enter into other restrictive covenants (such as confidentiality clauses and intellectual property provisions) and require you to sign up to longer non-solicitation or non-dealing restrictions.

Challenges and the enforceability of restrictive covenants

To be enforceable, post-termination restrictions must adhere to several key principles outlined in English employment law:

The most important element is reasonableness. Courts will assess whether the restrictions are necessary to protect the employer's legitimate interests and whether they go beyond what is reasonably required. This involves considering the duration, geographic scope, and the specific activities restricted.

Protecting legitimate interests
Restrictive covenants are only enforceable if they are designed to protect a legitimate interest, such as confidential information, trade secrets, client relationships, or specialised skills developed at the employer's expense.

Clear and specific language
The restrictions must be drafted in clear and specific terms, leaving no room for ambiguity or confusion.

Considers employee's role
The enforceability of the restrictions is linked to the employee's position and level of responsibility within the company. Stricter restrictions can be justified for senior executives compared to lower-level employees.

No unreasonable restraint of trade
Post-termination restrictions cannot be used to unreasonably restrict an employee's ability to find new employment, as this would be seen as a restraint of trade and is unlikely to be upheld in court.

Signed agreement
The employee must have agreed to the post-termination restrictions and must have received sufficient consideration (for example benefits or compensation) in return for accepting these restrictions.

Practical steps

If you are in the process of signing up to a new job, do not forget about non-compete clauses in the contract. Make sure you understand the extent to which you will be restricted from joining a competitor after you leave the company.

If you have already signed up to a service contract, it is still possible to negotiate a waiver, either in terms of the restriction’s geography or its duration. You do not have to accept that you are going to be tied into a non-compete for 12 months just because that is what you originally signed up to.

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