Non-compete reforms: implications for employers

How will government proposals to limit the length of non-compete clauses affect organisations? Hannah Netherton and Felicity Bramall report

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The government has announced significant employment law reforms. The measures are the first in a series of post-Brexit regulatory changes as part of its smarter regulation agenda. 

When parliamentary time allows, the government intends to legislate to limit the length of non-compete clauses to three months, providing employees with more flexibility to join a competitor or start up a rival business after they have left a job.

This reform would require significant changes to employment contracts, confidentiality agreements and staff handbooks. General market practice is often for senior and highly valuable employees to be restricted from competing with their former employer for anywhere between six and 12 months, post termination of employment. 

Non-compete clauses of 12 months (and occasionally more) have been found by the courts to be enforceable where they go no further than necessary to protect a legitimate business interest, such as workforce stability and goodwill. They are typically used where standard confidentiality and non-solicitation obligations would not provide sufficient protection to a business given the value of the knowledge and relationships of the individual in question. Investors in UK companies expect senior and valuable staff to be prevented from misusing confidential information and customer connections to protect the value of their investment.

The announcement comes two and a half years after the government consulted on measures to reform post-termination non-compete clauses in contracts of employment.  

The government says the proposed reform will give up to five million UK workers enhanced freedom to change jobs, with a larger pool of talent operating in the labour market. The government also believes that this change will boost the wider UK economy, by supporting employers to grow their businesses, widening the talent pool and improving the quality of candidates they can hire. At present, the empirical evidence for this is unclear. 

Other methods of restraining departing employees will remain available to employers, including using paid notice periods, garden leave or non-solicitation and non-dealing restrictions. 

The government’s announcement suggests that this legislation will apply to employees, and it is currently unclear whether non-compete provisions for LLP members and employees who are also shareholders or stock option holders (and so often restricted under separate corporate agreements) would also be captured. 

It is also not clear whether these reforms will have retrospective effect, and if so whether longer non-compete clauses will be automatically deemed to be limited to three months, or will be considered wholly unenforceable unless amended in line with the planned new legislation.

The intended reform falls short of other proposed changes being seen around the world; for example, the Federal Trade Commission’s proposals in the US to ban non-compete clauses between employers and workers altogether, which was one of the potential reforms on which the UK government had consulted. It is unclear from the policy paper when we might expect these changes to come into effect, but the government intends to legislate ‘when parliamentary time allows’.  

This reform will be the first time that the UK legislates on this topic (as there is currently no applicable EU or UK legislation that deals with this legal regime). It will be a significant risk issue for organisations that currently rely on these restrictions to protect their business interests.

Hannah Netherton is a partner, and Felicity Bramall an associate, in CMS’s employment team