As the government announces plans to limit the duration of non-compete clauses, Rob Moss examines whether a proposed three-month limit is likely to encourage entrepreneurship and innovation or, as some experts believe, have the opposite effect.
Non-compete clauses are designed to protect an employer’s business interests by limiting an employee’s activities after their employment comes to an end.
Typically, they prevent employees from working with a competitor, starting a competing business, or soliciting customers or other employees within a certain time frame after leaving their employer.
The use of non-compete clauses has become a contentious issue in recent years. While employers argue that they are necessary to protect trade secrets and customer relationships, critics claim they stifle competition and inhibit entrepreneurship.
How non-compete clauses work
Non-compete clauses must be carefully drafted to be enforceable. They must be designed to protect legitimate business interests, but they must also be reasonable in scope.
Change to non-compete clauses
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A clause that is too broad in terms of geographical reach or duration, for example, is likely to be considered unreasonable and therefore unenforceable.
The enforceability of non-compete clauses is decided on a case-by-case basis. The courts will typically consider factors such as the nature of the business, the role of the employee, the information that person had access to, and whether the restrictions are necessary to protect the employer’s business.
Time limits to non-compete clauses
In May 2023, as part of the government’s Smarter regulation to grow the economy policy paper, the business and trade secretary Kemi Badenoch proposed to limit the duration of any non-compete clause to three months, providing employees with more flexibility to join a competitor or start up a rival business after they have left a position.
As part of a package of measures announced, including changes to the working time record keeping and changes to TUPE, Badenoch says: “I have listened to the concerns of businesses of all sizes and have made it a priority to tackle the red tape that holds back UK firms, reduces their competitiveness in global markets and hampers their growth.
“We are taking back control of our laws after Brexit, reducing and improving regulation and giving businesses the freedom to do what they do best – sell innovative products, create jobs and grow the economy.”
If non-compete clauses are limited in the future, a longer notice period will probably become more appealing, even given the greater cost” – Mike Tremeer, Fladgate
Limiting the duration of non-compete clauses to three months, according to the government, will give up to 5 million UK workers greater freedom to switch jobs, apply their skills elsewhere and even earn a pay rise.
The government says the non-compete clause limit will not interfere with the ability of employers to use paid notice periods or garden leave, or to use non-solicitation clauses. The reforms will not affect arrangements on confidentiality clauses, nor will they affect restrictions on former public sector employees under the business appointment rules.
The government says the change will be a boost to the wider UK economy, supporting employers to grow their businesses and increase productivity by widening the talent pool, and improving the quality of candidates they can hire.
Reaction to changes in non-compete clauses
Mike Tremeer, employment partner at law firm Fladgate, says: “Currently the contracts of employment for many employees, particularly senior executives, will have non-compete clauses which prevent them from joining a competitor business or setting up in competition for a period after the termination of their employment.
“Most common is a six-month restriction… After six months, much confidential information will lose its usefulness and a six-month period will have allowed the employer to replace relationships with clients, suppliers and employees.”
Employment law changes
Experts argue that limiting the duration of non-compete periods to three months could damage employers as key employees could join competitors much sooner, particularly in fast-moving industries such as tech and finance.
Tremeer says that in practice, he expects many employers will introduce longer notice periods for senior and valuable employees that will enable them to “keep them out of the market” for longer than three months.
“If a senior executive resigns to join a competitor, but has to give 12 months’ notice of termination, the employer can place them on garden leave for the full 12-month period,” he adds. “Previously that was a cost that the employer would not want to bear – and it could avoid doing so by having a longer non-compete clause. But if their non-compete clause is limited in the future, a longer notice period will probably become more appealing, even given the greater cost.”
Tremeer believes there are thousands of six-month non-compete clauses currently in place across the UK. “Will those restrictions no longer be enforceable meaning that employers must update current contracts of employment in place? Or will the reform only apply to contracts entered after the date that the legislation is introduced? The justification behind many of the changes announced yesterday was that it will cut red tape for businesses – imposing the burden of updating a large number of contracts seems to do quite the opposite.”
Impact on gardening leave
Keystone Law’s employment partner Emma Clark agrees that gardening leave periods are likely to be made longer. “The government initially carried out a ‘call for evidence’ of non-competes in 2016,” she explains. “It responded in 2018 stating it is not necessary to take any further action in this area at this stage. It was unclear why the government put out a second call for evidence in 2021 regarding non-competes. In any event following that consultation, it has clearly decided to make major changes.
“It is important to note that all non-compete clauses are unenforceable, unless (i) they protect the employer’s legitimate business interest (such as protecting confidential information), and (ii) the clause itself is no wider than as reasonably necessary to protect that interest. Therefore, the future cap on the length of non-competes limits will still require those non-compete clauses to be drafted effectively and to be necessary to protect the business should that employee leave the organisation.”
She adds: “Employers are likely to make greater use of garden leave provisions and enhance confidentiality provisions in their employment contracts as a result of the forthcoming change. They should also note that other post-termination restrictive covenants, such as non-solicitation of clients and non-poaching of employees, can last for longer than the three-month cap on non-competes provided, of course, that such restrictions comply with the above requirements in order to be enforceable.
“It is unclear if the cap of three months applies to employee shareholders and to members of LLP’s and partners but the devil, as ever, will be in the detail.”
Will limits encourage innovation?
Charlie Barnes, legal services director, RSM UK, says limiting the duration of non-compete clauses could have the reverse effect on innovation if companies feel unable to protect themselves from key employees leaving to join a competitor, taking confidential information with them, in just three months.
“If these changes are made, such businesses will need to revisit contracts of employment to require longer paid notice periods or garden leave clauses to keep senior leavers away from competitors for more than three months. This will impose a larger financial burden on businesses,” he says.
Non-compete clauses have long been a feature of employment contracts in the UK, but their use has repeatedly come under scrutiny. While they continue to play an important role in protecting businesses, it is clear that a balance needs to be struck between the rights of employers and the rights of employees.
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The government says it will publish further guidance ahead of the implementation of the packages of regulatory change in the summer, although on the proposed limits to non-compete clauses, it says it intends to legislate “when parliamentary time allows”.
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