Non-compete clauses to be capped at 3 months

The government has announced plans to introduce new legislation to impose a cap on the length of non-compete clauses in employment contracts – they propose a cap of 3 months duration.  The policy paper called ‘Smarter Regulation to Grow the Economy’ includes a number of employment-related changes but this one is, in our view, the most significant.

The government sets out its rationale for the cap at paragraph 4.3. They say that whilst non-competes can play an important role in protecting businesses who invest in their staff, they have become a default part of too many employment contracts, inhibiting workers from looking for better paying roles and limit the ability of businesses to compete and innovate. The government says it intends to legislate ‘when parliamentary time allows’ and so provide employees with more flexibility to join a competitor, or start up a rival business, after they have left a position. Notably, however, the government does not plan to interfere with the ability of employers to use gardening leave clauses,  non-solicitation or confidentiality provisions to protect the business. As a result, those devices are likely to become even more important.

This latest announcement represents a shift by the government. In its consultation on non-competes which closed over two years ago they had proposed two options. One was allowing employers to use non-competes but at a price – so paying mandatory compensation to the employee in return for the restriction. The other was a complete ban on their use. As it turns out, they’ve rejected both of those and gone with this new option, a 3-month cap on the duration of the restriction.

So, let’s get reaction to this. Earlier Ed Goodwyn joined me by phone from a rather busy London office to discuss it:

Ed Goodwyn: “I think for once the government has got it about right. I think it was interesting they were considering going for the mandatory compensation route that was borrowing from other jurisdictions way of dealing with it, particularly some of the continental jurisdictions, where employers have to pay up front, effectively, for restricted periods and it has to be drafted into the contract. 
That would have taken us to a position that would have given us a lot of new law, a lot of new issues and, unfortunately, could have created more litigation as a result of being such a substantial change. My view is it didn't need to go that far and, equally, a complete ban on all covenants would have been taking it so far, the other way that the legitimate protections employers do need would be lost and that wouldn't help anyone. It would allow unfair competition to arise such as poaching staff and customers unfairly and I don't think that was the intention. So, where they've landed is – and this is some way off yet because this is still subject to primary legislation – is just to limit the most aggressive of all the covenants we see employment contracts, i.e., the covenant that says you cannot go and work for a competitor and they not banning it entirely, but it's limiting it three months. They make it plain in their paper, which is only three paragraphs on this point so there's a lot of detail yet to be seen, but they make it plain that the other covenants are going to remain as is. So, it means you can continue to have non-poaching of staff non-poaching, customer type covenants, confidentiality protection, drafting just as you normally do, and the same rules will apply to ensure that they are not drafted too broadly so as to be unenforceable and all that good case law that we've built up over the last 100 years or so, will still apply so we as lawyers, and clients, will know roughly where we stand in relation to those. So, the change won't be so significant so as to trigger too much unintended disputes and litigation. So, the three-month limitation, in principle seems relatively sensible. There are a few issues, though, that we need to be careful that are captured in the legislation when it comes out. So, for example, one of the key issues is this going to be limited just to employment contracts? I do hope so because you will often have a situation where you want to have more restraints in shareholder agreements, particularly when a company has bought another company, you want to make sure the founder can't just run off and set off in competition having bagged all the cash he or she has received from the deal. So as long as we carve out SPAs and shareholder agreements and things like that from this restriction then that will work. The other issue that immediately springs to mind is how will this is all going to be implemented? In other words, will employers who have contracts with more than three months’ notice, will they have to go away and amend all their contracts? Again, I do hope not because that's going to create an awful lot of work and creates lots of issues for employers. I rather hope the law will work whereby if you have a covenant that does say, six months, it will automatically, effectively, be limited to three months, but drafted as is, so the contracts won't need amending, but we'll have to see what the legislation has on that.”

Joe Glavina: “If this goes through - just thinking senior employees in, perhaps, a sales function or with specialist skills or knowledge - it’s going to mean employers will have to look to other ways to protect the business. So, more emphasis on garden leave, confidentiality provisions, non-solicitation clauses and so on, Ed?”

Ed Goodwyn: “Yes, I think so. So, those employers who do have a legitimate concern that they want to keep senior sales-type employees away from competitors, or employees who have particular knowledge of technical intellectual property issues, the practicality is it's very difficult to police any breach of confidences and so that's where the exclusion from going to work for a competitor is very valuable and if it’s only limited to three months, the intellectual property rights may still be very valuable even after three months. 
So, I think in those situations you will see employers thinking, okay, I've got to use another mechanism to protect my business and I think you'll see employers looking to, perhaps, extend notice periods from three to six to, perhaps, even 12 months and then in conjunction with that, check over their garden leave clauses so they can legitimately put those important and worrying employees in the garden. Now, of course, they'll have to pay for that because the way the garden leave provision works is they are kept out of the business and kept from going to work for another employer, but the current employer will have to pay salary during the course of the garden leave provision. So, I think employers in those areas where they do need to stop employees going to work for their competitors for more than three months there will be a focus on, perhaps, extending notice provisions and, in conjunction with that, a proper review of their garden leave provisions to make sure that they work, and you'll see more employers relying on those provisions going forward. Quite when this is all going to happen, though, is a moot point because, as I said, this will require primary legislation and even the government paper notes that it'll only be ready as and when there's enough parliamentary time and with all the changes going through, whether this will get through before we have a general election is to be seen. We have no idea yet as to where this will rank on the priority areas the government is facing.”

Joe Glavina: “So, given this legislation may be a long way off, if we ever see it, what’s the advice to clients in the meantime?”

Ed Goodwyn: “I think the main issue is wait and see, but wait and see with your eyes open, your ears open. We will be keeping our clients informed as to how this develops. It's always worth having a look now, though, at which of your employees you have a particular concern about so do an audit. There will be a few of your senior employees who this will be an issue and you might as well have a look so you’re ready for when the law changes as to which parts of your business you’ll need to look at. Beyond that, I think it is a wait and see issue. Again, this paper has come out following previous consultation papers and nothing has moved terribly quickly in this space. This has been a debate with the current government for at least 18 months. I would speculate that it's going to be ‘touch and go’ as to whether they get anything in before the election.”

The government’s policy paper is called ‘Smarter regulation to grow the economy’, published on 10 May, and we have put a link to it in the transcript of this programme. Another of the issues that paper deals with is TUPE – albeit a relatively minor change to the rules on consultation in cases of small TUPE transfers allowing businesses to consult directly with the affected employees rather than elected reps. That aside, there were numerous changes to TUPE which businesses would have welcomed which have been ignored, unfortunately. Next week we’ll hear from TUPE expert Gill Ross and get her view on the TUPE change which has been proposed, and those missed opportunities.

LINKS
- Link to the government’s policy paper is called ‘Smarter regulation to grow the economy’