Protecting business interests in light of the proposed limit on non-compete restrictions
Sophie Vanhegan and Lisa Coleman assess the possible impact of the proposed limit on non-compete clauses
On 10 May 2023, the UK government announced new proposals to limit the length of ‘non-compete’ clauses to no more than three months in duration. These clauses prevent an employee from joining a competitor or starting a rival business for a specified period of time after they have left employment.
Although the proposals remain subject to parliament passing legislation to enact the changes, the announcement has prompted much discussion on the potential impact if this change is implemented.
Despite the government’s stated intentions that the changes should drive competition and economic growth by making it easier for businesses to fill vacancies and attract better candidates, as well as their observation that job switching can improve productivity, many employers in the UK, especially within the tech, professional services and financial services sectors, see longer non-compete clauses as a valuable tool to protect their businesses.
The alternative options
Much of the detail on how the proposals would be implemented is to follow, including what will happen to existing non-compete clauses in employment contracts which exceed the three-month limit – for example, whether those clauses will be automatically voided, whether they will be read as being automatically reduced to the three-month limit, or whether the limit will only apply to new contracts entered into after the implementation date. However, should the current proposals be implemented, we would expect that employers will take steps to explore what alternative options there might be to protect their business and restrict employee behaviour on termination, for example:
- Tightening up confidentiality clauses, and increasing the use of other post-termination restrictions which are unaffected by the proposals, e.g., non-solicit, non-deal and non-poaching clauses.
- Extending notice periods and potential garden leave periods. The government considers this potential outcome in its consultation as one of the reasons for not banning non-compete clauses completely.
- Using partnerships/LLPs – the government has confirmed that the rule will only extend to contracts of employment and the contracts of ‘limb (b)’ workers, such that non-competes in other forms of contract, such as partnership agreements, are out of scope. It is possible that we will see a rise in the use of such structures to circumvent the three-month limit. The government decided not to extend its proposals to these due to the difference in bargaining power in other agreements and the difficulties in trying to define a ‘wider workplace contract’.
- Putting restrictions in business sale and shareholder agreements, or share or incentive plan documents, where possible. Again, none of these will be caught by the proposals.
- Relocating jurisdictions for key roles – if employers are concerned about still not being able to protect their business through other routes in the UK, it is possible that the proposals may instead drive some key roles outside of the UK.
Notwithstanding the potential fears of businesses at the prospect of a three-month limit to non-compete clauses, the limit may add some certainty as to likely enforceability for UK businesses and reduce the need for costly High Court litigation for employers, prospective employers and departing employees on whether to seek to enforce/strike down a non-compete, the outcome of which is often highly unpredictable. At the same time, however, this could also result in a spike in litigation focussing on breach of confidentiality obligations as another mechanism to protect businesses’ valuable know-how and secrets – certainly something seen in California where non-competes are banned. The UK government may also keep an eye on how the US’s proposed rule on banning non-competes state-wide (announced in January) progresses and the impact that has on market practice worldwide.
What are employers doing now in response?
There have been several efforts to change the law on non-compete clauses over the last decade, none of which have ever been implemented. As these proposals require primary legislation (and parliamentary time to pass that legislation), it remains to be seen whether these proposals will be implemented before the next general election.
We therefore expect most businesses will sit tight and wait for more certainty on whether this limit actually comes into force before taking any action. However, if the limit does come in, businesses who rely on such clauses for business protection will likely review their post-termination restrictions (and employment contracts more generally) to seek protection elsewhere.
Sophie Vanhegan is a partner and Lisa Coleman is a senior associate at GQ|Littler