End of Non-competes: aiding growth or deterring investment? | Fieldfisher
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End of Non-competes: aiding growth or deterring investment?



United Kingdom

We all know that growth of the UK economy and improved productivity are key aims of the UK Government. No or limited growth restricts the nation's ability to pay for the services we demand of our country, a more fully funded NHS, preschool childcare and so on.

Yesterday in a wide ranging policy paper snappily titled "Smarter Regulation to Grow the Economy" issued by the Department for Business & Trade, a number of changes to employment laws were announced, including rationalisation of some aspects of holiday pay, removal of elected employee representatives where there is a TUPE transfer in smaller employers, and limiting of non-compete clauses. The former arise out of Brexit and can be introduced by regulation. However the last of these is significant, will require an Act of Parliament and is in line with the policy direction being adopted in the USA where the Federal Trade Commission has announced plans to ban the use of non-compete clauses in the 47 US states where they are currently permitted (California is one of the 3 states that has already banned their use).
The UK Government is proposing that non-compete clauses, a type of restrictive covenant which purports to prevent a former employee from competing with their former employer, should be limited to 3 months in duration. The proposal raises a number of questions.
What are the clauses the Government has in mind?

Restrictive covenants, are clauses which are found in a wide variety of agreements. These clauses impose an obligation on a party to the agreement not to do something. They are most commonly found in sale and purchase agreements and contracts of employment. The UK Government's announcement is directed at their use in an employment contract or service agreement. Restrictive covenants in employment contracts come in various forms designed to protect an employer's legitimate business interests which it may have developed only after considerable investment of time and treasure. The UK Government proposal only applies to non-compete clauses, those terms that purport to stop a former employee being employed or engaged in activity that is competitive with their former employer's business.
The proposal does not apply to non solicitation or non dealing clauses, confidential information clauses, non poaching of colleagues, or garden leave clauses.  Despite this attempt to limit the impact of non-compete clauses, not only other types of restrictive covenants can be relied on, if properly drafted, but a senior executive will still be bound by fiduciary duties, limiting their scope of action, even after the 3 month time period in a non-compete has passed.
What is the proposed limitation on non-compete clauses?

The UK Government asserts that non-compete clauses unduly restrict the labour market and stifle competition, so it proposes to limit their application. Where such clauses are currently included in employment contracts their duration can vary depending on the circumstances of the trade or sector and the role performed by the employee. Their duration can range from a month to 12 months, the latter being only in exceptional cases.  The UK Government proposal is that a non-compete clause if included in a contract of employment should be limited to just 3 months from the end of the employment.

The policy paper sets out the UK Government's intention in broad terms and so until we see the draft legislation to enact this intention, questions remain. For example, will any period on garden leave count towards the 3 month period of non-competition? Will the legislation in any way impact the current legal requirement that the terms of such a clause should be drawn in reasonable terms? How will existing non-competes in excess of 3 months be treated – will they be rendered unenforceable or will the period of restriction be capped at 3 months?  Will there be a requirement for employers to pay the employee who is the subject of such restraints a sum in compensation, a mechanism used in several European jurisdictions and one of the options floated by the UK Government in an earlier consultation paper. The most significant uncertainty is when the necessary primary legislation will be laid before Parliament, and here the UK Government has set no timetable, simply saying it will do so when Parliamentary time allows.

There may be many more pressing developments which make demands on an employer's time, such as dealing with the cost of living crisis and the "War for Talent", but this issue should be on your agenda as a recurring item. The frequent review of restrictive covenants is prudent business practice to ensure they match a business that may have developed and changed, or where internal promotion has been effected or greater responsibilities' assumed without new covenants being agreed with an employee.
If you need further information about this proposed development and whether or how it might impact your business, please do not hesitate to contact your usual contact in EPIC or any other member of the EPIC team.