The King’s speech 3 weeks ago made no mention of the government’s planned reform of non-compete clauses, which was a surprise to many, but with the government restating its commitment to growing the economy it may well reach the statute books before the next General Election. In the meantime, with uncertainty heightened, what should employers be doing now? We’ll consider that.
A reminder. Back in May the government finally responded to its 2020 consultation and confirmed its plans to limit the length of non-compete clauses in employment contracts to three months. Their rationale is that a 3-month cap will provide more flexibility for employees to join competitors, or start up a rival business, and that the wider economy will benefit from a wider talent pool.
The restriction will not, however, affect the ability of employers to use longer paid notice periods or gardening leave, or to use non-solicitation clauses or confidentiality clauses to achieve similar protections and, going forward, these are options we fully expect employers to consider as a means of restricting competition and helping to protect the business.
Since the government’s response was published back in May, this has been the subject of a lot of discussion in employment circles so let’s hear more about it. Ben Brown is an employment lawyer based in Leeds and earlier he joined me by video-link to discuss some of the options. I started by asking Ben for his key message to clients:
Ben Brown: “The key message is, certainly, that we don't know enough to properly strategize what is important for you to do now in terms of how you react to the fact that non-competes are going to be limited to three months, but we do know enough to know that we need to do our due diligence. That's the most important point and what I mean by that is it's always a good idea to know what is in your contracts but I think it's going to be even more important now to know who are your key people? Who are key to your business? Who has the confidential information? Who, if they went to a competitor, could immediately begin to compete and what is in their contracts? Do they have six month non-competes? Do have three months? Do they have twelve months? What other restrictions do they have in there? Let's get our ducks in a row now to make sure that, when the government gives us more information, we know who we need to be targeting and what their contract currently says.”
Joe Glavina: “We know the new legislation is only going to affect non-compete clauses and that other restrictions, other mechanisms, will remain available to employers including extended notice periods. So, perhaps extending the notice period from three months to six months, or even perhaps 12 months. Thoughts on that?”
Ben Brown: “I think inevitably, that is going to be a strategy that some, if not all, employers are certainly going to want to consider, some very much so. That is probably going to be, going forward, the best strategy when you want to tie people into longer periods in your business to ensure when they give you notice that they want to leave, they're not going to immediately, within three months, begin to compete and use the know how that they have stored after being employed with you. Now the consequence of that is not going to be the same for every business but for most businesses the immediate consequence of longer notice periods is increased cost because you are going to have to pay that person. Despite them not wanting to be in your business and having given notice to leave, they are going to be in your business for a prolonged period of time so cost is a big issue. Normally disputes in this theatre revolve around people who take confidential information or who strategize about future plans whilst they remain in employment. So, the risk for employers is there's a longer period of time in which that person is going to be in your business in which they could be using that time to plan for their future endeavours. So, that's quite a serious risk. The follow on from that is, well, what do we do about that? I think garden leave then becomes the key question.”
Joe Glavina: “Yes, I was going to ask you about that relationship between notice periods and garden leave because ideally they would dovetail together with, maybe, the period of garden leaves matching the length of the notice period. Is that worth looking at?”
Ben Brown: “So firstly, let's go back to the original point about due diligence. Not all contracts will have a garden leave provision in them. All contracts should, and probably will, have a notice provision in them, but they might not necessarily have a garden leave provision which allows you to put someone on garden leave for some or all of a notice period. So, let's know whether we're in that position or not because I think that's going to be critical going forwards because, to my point about someone being a risk whilst they're in the business, from an ER perspective, as well as from a cost perspective generally, if you can't contractually safely put them on garden leave you've got to keep them in the business whilst they're on notice or you've got to increase the risk by unilaterally putting them on garden leave and risk breaching the contract which has its own knock on consequences, potentially, in terms of the enforceability of the covenants that you do have in there. So, I think garden leave is going to be really important but, firstly, check whether you've got that provision, that right, to do it but I think, yes, in principle, if you have to stomach the additional cost of putting someone on notice for a longer period of time, you'd prefer that person not to be in the business having all the risks that go along with that in my view.”
Joe Glavina: “Going back to the government’s plan to cap non-competes at 3 months, what’s the impact of that going to be on existing restrictions in current employment contracts where the period exceeds 3 months? Is the government planning that those would those suddenly become unenforceable?
Ben Brown: “It’s a good question. We don't know is the basic answer. We don't know what the position is going to be but if I was asked to predict, if I was a gambling man, if I was asked to put money on it, I would say that it's very unlikely that the government is going to say every non-compete, that is longer than three months in an existing contract of employment is null and void. That in itself would be a considerable undertaking for the vast majority of organisations to then have to look at that and address the scenario where they don't have that any protection at all. I just can't see that being a measure that the government will introduce, in my view. Perhaps the larger question, I guess, is, in terms of the restricted period itself, is that going to apply retrospectively or is it going to apply just to future contracts? Again, we don't we don't know that question. I would guess it is going to apply to all contracts, frankly, and the way that they would implement that is that they would say, well, any non-compete that was longer than three months, the automatic assumption was that it would just be limited to three months. But, again, that's not quite straightforward because the court won't just accept, oh, well, it was six, now it's three. The court will still look at whether it's reasonable for that period to even be three months, never mind that it was formally six months. So, it's not quite as simple as a reduction, and then automatically enforceable. There still will be that extra step that you will need to go through in enforcement terms.”
Joe Glavina: “Finally, Ben, is there anything else to add? A final message for viewers?”
Ben Brown: “I think one important point that is kind of a knock-on consequence of the considerations around notice, and the considerations around putting people on garden leave, is what other contracts could potentially be relevant, or could there be a knock-on consequence for? I think the first point to make is that we're only talking here about employment contracts. What we don't know is whether it's going to apply to covenants that an employer might want to put in a settlement agreement. I think it probably might, because we're talking about statutory employment rights there and also, obviously, a contract, we're talking about statutory employment terms. So I think, again, I probably would say it is but we don't know. What we know it's not going to affect is commercial contracts, so share purchase agreements, partnership agreements, etcetera. The limitation on non-compete is not going to be something that's going to apply in those scenarios. So, when you're doing your due diligence check whether you've got those covenants in commercial contracts, other than in employment contracts that will be affected. That's one point. The final point I would make is just about share incentives. So, in certain cases, if your rules relate to lapsing of awards in cases where someone is dismissed, you just need to make sure that you know about how those provisions apply in circumstances where you are extending notice, or you're extending periods of garden leave for a long duration because you need to know when those awards might lapse or what when they might be vested.”
It was back in May when the government published its response to its consultation on non-compete clauses and made it clear they would be imposing a 3-month cap. We covered it at the time in our programme ‘Non-compete clauses to be capped at 3 months’ with Ed Goodwyn providing the insights. That programme is available for viewing now from the Out-Law website and we’ve included a link to it for you.
Meanwhile, as we have been reporting regularly in this programme in the past year or two, the US is reviewing the use of non-competes and the latest news is there has been a development with new legislation in the state of California. We’ll be speaking to US lawyer Ben Stockman about that shortly so do watch this space.
- Link to HRNews programme: ‘Non-compete clauses to be capped at 3 months’
- Link to Government’s Response to consultation on non-competes