Government consultation response: non-compete clauses to be limited to 3 months

The Government has announced plans to limit the length of non-compete clauses in employment contracts, in its response to a 2020 consultation on their reform.

The 2020 consultation

Non-compete clauses are one of several types of post-termination restrictions (“PTR”s) that businesses may include in an employment contract, which restrict an employee’s ability to work for a competitor following the termination of their employment. To be enforceable, PTRs must be carefully drafted to ensure they are no wider than reasonably necessary, and they protect the business’s “legitimate business interests” – such as confidential information or relationships with clients. If a PTR falls outside of these requirements, a Court may invalidate it.

The concern with non-compete clauses is that they arguably disincentivise employees from changing jobs, which could restrict the talent pool and innovation in the wider economy. In 2020, the Government published a consultation paper exploring options for reform, highlighting two options in particular:

1. Mandating that non-compete clauses be unenforceable unless the employer provides compensation for the period of restraint; or
2. Making all non-compete clauses unenforceable.

The response

Although most respondents to the consultation favoured the first option, the Government’s response expressed the concern that requiring businesses to pay for a non-compete period would impose substantial costs and stymie growth. The Government has instead rejected both options, and has proposed an option 3 to limit the period of non-competes to 3 months.

Comment

In September, the Recruitment and Employment Confederation reported there were 3 million unfilled vacancies in the UK. The Government surely hopes its reforms to non-compete clauses will give some much-needed elasticity to an incredibly tight labour market, but businesses may still find workarounds. There will be no changes, for example, to garden leave clauses, which prevent employees from working for any other business, not just competitors.

What steps should employers take?

At the moment, the proposed changes are just that – proposals. The Government’s response suggests only it will bring forward legislation “when parliamentary time allows”. Given a surfeit of ongoing distractions (not least of which are sure to be next year’s looming parliamentary elections), we are unlikely to see any sudden developments. In the meantime, non-compete clauses lasting longer than 3 months will continue to remain effective.

It is nonetheless worth reviewing existing employment contracts now to consider alternatives for protecting your business. For instance, other restrictions (such as non-solicitation or non-dealing provisions) will continue to provide lengthier protection.

For advice on non-compete clauses or any other employment law issue contact Kendal Youngblood at Thomas Mansfield Solicitors on 020 7377 2829 or email [email protected].