Proposals to Limit Non-Compete Clauses
The government has published a response this month (May 2023) only three years after carrying out a consultation on changes to non-compete clauses back in 2020.
The purpose of the consultation was to seek views on:
- proposals to make non-compete clauses enforceable only when the employer provides compensation during the term of the clause
- additional measures including options to enhance transparency where non-compete clauses are used, and placing a statutory limit on the length of non-compete clauses
- an alternative proposal to make post-termination non-compete clauses in contracts of employment unenforceable.
Non-compete clauses have been governed up until this point by case law rather than statutory law, and in practice are only enforceable when drafted such that any non-compete is no wider than it is reasonably necessary for the employer to protect their “legitimate business interests” - that could include but is not necessarily limited to confidential information and customer connections.
The headline response to the consultation by the Government is that their proposal is not one of the two main options considered in the proposal but a third option, “introducing a statutory limit on the length of noncompete clauses of three months. The Government will apply the statutory limit of three months to non-compete clauses only, and in contracts of employment and limb(b) worker contracts only”. The proposals do not affect other clauses such as non-dealing, non-solicitation, notice periods, leave, nor confidentiality clauses.
The government hopes that the proposals will make it easier and more flexible for employees to move roles and start their own businesses. In practice, employers are likely to beef up other clauses in relation to post-employment to prevent competition, such as garden leave, or notice periods, after which the new three month non-compete clause can come into effect.
The response does not address settlement agreements, nor whether non-competes would become void in their entirety, or whether simply any period past the three months would be unenforceable. It does suggest that employers will need to have an underlying business need and that it is proportionate and necessary to impose any restriction on an employee post-employment.
While implementation is still a way off, employers should consider the question as to whether their interests are best protected currently, and should this come into effect, particularly in areas of work that are particularly sensitive. More robust garden leave or longer notice periods may become crucial to protecting business interests.
Posted on 06/07/2023 by Ortolan