Employment: Putting a cap on non-competes

Shortly following publication of the Department for Business & Trade’s policy paper on Smarter regulation to grow the economy, the UK Government announced proposals to limit non-compete clauses in employment contracts to a maximum of three months.

Post-termination non-compete clauses (“non-competes”) are often found in employment contracts. They seek to prohibit the employee from working for a competitor or starting their own business in competition with the employer for a defined period following the termination of their employment. The enforceability of non-competes is always subject to the common law presumption that they are assumed to be unenforceable unless they protect a legitimate business interest, are no wider than reasonably necessary to protect that legitimate business interest, and are not otherwise contrary to the public interest.

Selective limit

The proposal to limit the length of non-competes comes as a response to the 2020 consultation Measures to reform post-termination non-compete clauses in contracts of employment. On 12 May 2023, the Government published its response to the consultation, along with an impact assessment.

In its response the Government noted that non-competes can range in duration from one month to 24 months and further research found that the average duration of a non-compete is six months, which was the case for approximately half of businesses using non-competes. For this reason, the Government believes that the new cap will be impactful while still giving employers a degree of flexibility to use non-competes “where they have a legitimate business reason to do so”.

The limit will only apply to non-compete clauses in employment and worker contracts. This means that other frequently used post-termination restrictive covenants, including non-poaching, non-solicitation and non-dealing, will not be capped. The cap will not apply to “wider workplace agreements” such as LLP or shareholder agreements. It is not clear whether it will apply to settlement agreements, as they are not mentioned in the Government response. The introduction of the cap is likely to lead to increased use of longer notice periods, garden leave, other restrictive covenants, confidentiality clauses and intellectual property provisions.

The Government has decided against requiring employers to provide compensation to the employee for the period that the non-compete restricts them, noting the “substantial direct cost to businesses”. In addition, the Government does not intend to alter the current position that allows employers to unilaterally waive a non-compete clause.

Timing questions

We do not yet know definitively whether this cap will be applied retrospectively. The impact assessment notes that, under the preferred option, the “Government would make all non-compete clauses that are longer than three months unenforceable. The existing common law approach would continue for non-compete clauses that are three months or less” (emphasis added). Taken literally, this would infer that the cap will be applied retrospectively to all non-compete clauses in employment contracts.

We also cannot be certain when the cap will come into force, with the Government advising that the primary legislation needed to implement the change will be introduced “when parliamentary time allows”. The Government has committed to publishing guidance on non-competes in order to enhance transparency.

According to the Government response paper, German non-compete clauses are enforceable for up to 24 months, with Italian equivalents having the potential to last three to five years. While the move by the Government to limit non-competes to three months in the UK is not as drastic as an outright ban, it will bring about a notable change in practice, with the impact assessment predicting that the cap may affect 70% of non-competes under employment contracts.

Further changes?

It is also worth noting that on 12 May 2023 the Government launched a policy paper and consultation on Retained EU employment law reforms, seeking views on reforms to the Working Time Regulations, holiday pay and the Transfer of Undertakings (Protection of Employment) Regulations (TUPE). This comes after the Government confirmed that all retained EU law will continue to be enforceable in the UK from 31 December 2023 unless it is expressly repealed or amended. The proposals include removing the current obligation on businesses to record all workers’ daily working hours, merging basic and annual leave entitlement and introducing rolled-up holiday pay.

Given the potential widespread application of any and all of the proposed changes to UK employment law, noting the level of uncertainty that remains, employers should be alive to the risk of increased litigation in this area. Even though the cap on non-competes is only a proposal at the time of writing, we may begin to see a shift in market practice in anticipation of the implementation of this change – especially given the uncertainty over the possible retrospective effect of the proposal.