The Government plans to limit restrictions around non-compete clauses when employees leave to join a competitor or set up a rival business, according to a recently published policy paper.
Proposals in the smarter regulation to grow the economy policy paper include limiting the length of non-compete clauses to a maximum of three months. Typically, such clauses are drafted to limit employees from acting in competition with their former employer for as long as 12 months.
The use of non-compete clauses in employment contracts is designed to protect business interests and may restrict a leaving employee from working for a similar business, or setting up a competing business, often within a defined geographical radius and for a defined time as such clauses need to be drafted as narrowly as possible in order to be enforceable.
Other types of post-employment restrictions may seek to prevent a leaving employee from soliciting or dealing with clients or poaching colleagues within a defined period, but the proposed reforms do not extend to such clauses. Nor do they affect so-called ‘garden leave’ which is used to keep an employee out of the market by keeping them on the payroll but requiring them to stay out of the workplace.
The three-month cap will apply to contracts of employment and worker contracts in England, Wales and Scotland, but not to partnership or shareholder agreements, where power dynamics are likely to be more balanced.
There is no time frame for when the legislation may be drafted and on the parliamentary agenda, employers might benefit from planting the seeds that will protect against future changes. That could include evaluating existing confidentiality clauses and those restricting employees from poaching clients if they leave, and tightening up where necessary.
To keep things in perspective, it is worth remembering that very lengthy non-compete clauses are rarely upheld, and as an employer you are both poacher and gamekeeper: protecting the business when staff move on is essential, but you may also have greater opportunity to recruit.
The changes set out in the policy paper are described as being intended to boost the UK economy by improving flexibility in the workplace and the opportunity to recruit talent. Other proposals cover changes to cut the amount of reporting on Working Time Regulations, and to simplify employment regulations when a business transfers to a new owner.
The view that competitive labour markets can play a crucial role in increasing competitiveness and economic growth, is reflected in other countries. The New York State Assembly has recently approved a bill (June 2023) that bans workplace non-compete agreements altogether, joining other US states such as California, Oklahoma, and North Dakota.
Employers also need to be aware of the impact of shorter non-competes on possible enforcement action, as the window for proceedings will be even tighter than it is now. Even if there is no desire to take enforcement action, the shorter timeframes may necessitate that steps necessary to protect the business are taken more promptly so developing a contingency plan for such circumstances is advisable. Adding a clause to existing contracts, requiring employees to share information at the earliest opportunity, is also an option to consider.
Generally, it is good practice to keep a close ear to the ground, and to have procedures to monitor for any unexpected activity in data collection by employees, or other relevant triggers, whatever the future for non-competes may be.
