Reform of non-compete clauses in employment contracts

Posted: 06/12/2023

It has now been six months since the government published its eagerly awaited response to the 2020 consultation on reforming non-compete clauses in employment contracts and confirmed the following:

• a three-month statutory cap on non-compete clauses in employment contracts would be introduced ‘when parliamentary time allows’;
• the cap will apply to employment and worker contracts only and not to other workplace contracts such as LLP agreements or shareholder agreements;
• where the non-compete clauses last for fewer than three months, existing common law principles of enforceability will apply;
• there will be no cap for other restrictive covenants, such as non-dealing or non-solicitation clauses; and
• further guidance on the use of non-competes and the underlying law would be published in due course.

Possibly more noteworthy was the government’s decision not to proceed with the two proposals which formed the basis of the 2020 consultation, namely the proposal to introduce mandatory compensation for non-compete clauses (as happens in some other jurisdictions, including France and Germany) or, alternatively, to ban non-compete clauses in employment contracts entirely (as is the position in certain US states, such as California). 

This decision appears to reflect the shift in mood in the pre- vs post-Covid world. Back in 2018 the official government position on non-compete clauses in employment contracts was that they were a ‘valuable and necessary tool for employers to use to protect their business interests and do not unfairly impact on an individual’s ability to find other work’. However, contrast this with the comments in the May 2023 response that non-competes ‘can inhibit workers from looking for better paying roles and limit the ability of business to compete and innovate’ and it seems likely that the post-pandemic agenda of increasing competition and boosting the economy has played a part in the government’s decision.

Whether the proposals will have the desired effect, however, remains a matter for debate, with high-profile members of the business community voicing strong opposition. In a letter to The Times, Sir James Dyson was hugely critical of the proposals, claiming that by introducing a cap on non-competes, the government is ‘sabotaging the very intellectual property underpinning all future growth’. It seems paradoxical that the government’s stated objective is to unleash innovation, yet innovators themselves are concerned that the proposals only serve to undermine their competitive edge.

While much of the detail to the proposals is yet to be released, the likely impact is already the subject of keen discussion across the legal and business world, with the following issues emerging:

Uncertainty for businesses and employees

At the forefront of this is that it is not at all clear when the proposals will become law (indeed it may not happen before the next general election which, if that were the case, may result in them being abandoned by an incoming government). In the meantime, businesses and employees find themselves facing considerable uncertainty. Clients are already asking whether it’s advisable to delay introducing new covenants until it’s clearer whether and, if so, when the cap will become law.  

There is also the question of what happens to existing longer non-competes at the moment the cap comes into force. Common sense suggests automatically reducing the length of the restricted period to three months, but without an indication from the government on this, employers will be concerned about them being struck out entirely. In the interim, there’s also the prospect of the courts being influenced in their decisions around enforceability of longer non-competes if it’s seen as public policy to limit non-competes to three months, even if the proposals have not yet come into force.  

Lastly, if the proposals become law, then employment contracts will have to be reviewed and potentially varied to reflect the new statutory cap. This will undoubtedly be a costly and disruptive exercise for employers so they will be keen to understand when to plan for that.

Greater reliance on other terms

If the cap becomes law, then there is likely to be a greater reliance on other terms, such as longer notice periods coupled with garden leave, which may have the unintended consequence of undermining the competitive benefits of the statutory cap. As the statutory cap only bites in employment and worker contracts, there’s likely to be increased reliance on non-competes in other types of contracts such as LLP agreements, share and option-related incentive schemes or business sale agreements, by employers seeking to replicate the level of protection they currently enjoy. Job notification clauses, where an employee is required to inform their employer if they receive another job offer, are also likely to be on the rise, as these enable employers to take action at an early stage to best protect the business.

Increased litigation around alleged breaches of other obligations

Following the introduction of a ban on non-compete clauses in California, there was a marked increase in litigation surrounding other types of obligations, such as confidentiality and the duty of good faith. It is foreseeable that the same would occur in the UK were the proposals to become law.

Favouring of other jurisdictions

Historically, the UK has appealed to overseas businesses as the jurisdiction of choice because of its well-established approach to post-termination restrictive covenants. Many businesses considered that the UK struck the right balance between the need to protect the legitimate interests of the business and fairness to the employee by not subjecting them to unreasonably restrictive obligations.  Indeed, there are many examples of businesses choosing English law as the governing law of their contracts for this very reason. If the proposals become law, over time, we may well see an increase in employers (both domestic and overseas) choosing alternative jurisdictions for their employment contracts in an effort to achieve the desired level of protection, which innovators are already predicting will be lost by the imposition of the statutory cap on non-competes.

Although we can only speculate as to the likely impact of the government’s proposals at this stage, experience from other jurisdictions which have legislated to limit the impact of non-competes in the past does provide a strong indication of the direction in which the UK may go, in the event the proposals become law.  

However, six months after the proposals were announced, it doesn’t appear that businesses are rushing to make changes to the restrictions they have in place, and one might surmise that this has something to do with current feeling about the likelihood of a change of government at the next election. If they do become law, the jury is also out as to whether the proposals will have the desired effect of boosting the UK’s economy. One thing is certain, however: even if this signals the death of the lengthy non-compete clause, employers will find other ways of achieving the necessary protection. After all, in such a tough economic climate, can they afford not to? 

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