Background
Non-compete clauses are terms in an employee’s contract restricting their ability to work for a competing business, or set up a competing business, for a defined period after termination. They are a type of ‘restrictive covenant’.
Currently, there are no statutory provisions that govern non-compete clauses. Common law says that employers can only rely on non-compete clauses if they are no wider than reasonably necessary to protect the employers ‘legitimate business interests’. The two main such interests are to protect confidential information and customer connections.
For example, it might be reasonably necessary to stop a hairdresser from working in a competing salon within say two miles (a typical distance travelled for a haircut) for say six weeks (a typical duration between haircuts). But in reality, typical non-compete clauses have a duration of six or even twelve months.
The government thinks that stopping staff from moving to a competing role is hindering the flexibility of the labour market. It wants to limit the maximum duration of non-compete clauses to three months. This is set out in their response to an earlier consultation.
What are the changes?
The Government consulted on reform to non-compete clauses in contracts of employment between two years ago and they have published the responses. It floated the ideas of banning non-compete clauses and introducing mandatory compensation to be paid during the restricted period.
The Recruitment and Employment Confederation (REC) opposed to a complete ban; it said that employers and staff should be free to agree these terms for themselves.
The Government doesn’t propose to interfere with restrictions other than non-compete clauses (such as non-soliciting clauses, non-dealing clauses and confidentiality clauses) or notice periods, or gardening leave.
The government also doesn’t propose to affect restrictions under the Business Appointment Rules (special rules for public servants).
The proposed changes will only apply to worker and employment contracts – not to any others such as shareholder contracts or partnership agreements.
What is the reasoning?
Currently, non-compete clauses affect around 5 million employees, and have a typical duration of 6 months.
The Government argues that the proposed three-month limitation will boost the UK economy by supporting senior white-collar employees to more easily find work for themselves or start their own businesses.
The Government makes the point that what goes around comes around; a shorter limit on a non-compete clause’s duration may not be what the employer wants when an employee departs, but it helps the employer when it’s recruitment.
It thinks that shorter non-compete clauses will benefit employees too, because longer ones inhibit them from looking for better-paying roles.
The Government says that this change supports its goal of creating a ‘high-skills, high-wage’ economy, where there is more flexibility.
Conclusion
The three-month limitation will still be subject to the same common law principles as now. But it’s not clear yet whether non-compete clauses will be capped at three months or simply be unenforceable. There is also uncertainty about which non-compete clauses the changes should affect – will it be only those entered into after the law comes into force, or will it include existing ones?
There have been no changes yet, with the response vaguely saying that the Government will introduce legislation ‘when parliamentary time allows’. These changes may also depend on the outcome of the 2024 election. We don’t know what is Labour’s stance on non-compete clauses.
So, employers don’t yet need to re-draft non-compete clauses. However, they may find it a timely reminder to ensure that their other restrictive covenants are well-drafted.
We will, of course, keep you updated with the progress of the proposal.
Image used under CC courtesy of Chris Tucker Mear