Government Proposals To Reduce The Time Limit Of Non-Compete Clauses

The Government has recently announced proposals to limit the duration of post-termination non-compete clauses to three months.

The policy paper published by the Government noted the important role that non-compete clauses can play in protecting business interests, but, highlights that they have unnecessarily become a default part of too many employment contracts. Subsequently, these clauses often mean that employees feel like they are unable to look around for better-paid employment and restrict recruiting businesses’ ability to compete and innovate.

Below, we have outlined the current rules concerning post-termination non-compete restrictive covenants and what impact the reduction in the duration of these clauses could have.

What are non-compete clauses and how do they work?

As we have noted above, non-compete clauses are a type of post-termination restriction or restrictive covenant, that a business may decide to include in an employee’s employment contract.

Non-compete clauses protect employers and their important, sensitive, and invaluable information from use by employees after their employment has terminated. Whilst obligations of confidentiality should always be included in an employment contract in a manner that prevents the use or disclosure of commercially sensitive information after the end of employment, such clauses can be difficult to police.

A non-compete clause, tied to the likely duration of that information’s sensitivity can therefore be a useful tool for an employer, to help ensure that confidential information does not pass into the hands of a competitor.

A non-compete clause can prohibit:

Non-compete clauses usually include a specific duration and in practice, this can vary from three months to up to two years.

Non-compete clauses and all other types of restrictive covenants in employment contracts are governed by case law which has developed over time. For a restrictive covenant to be enforceable, an employer must be able to show that:

Legitimate interests include an employer’s trade connections with customers or suppliers, confidential information, and maintaining the stability of the workforce.

Difficulties often arise in relation to the second stage of the test. When assessing reasonableness, the Court will have regard for the interests of the parties and the public interest.

The question of reasonableness must be considered at the point when the covenant was entered, and not in light of subsequent events. Additionally, the restriction must be no wider than is necessary and afford ‘no more than adequate protection’ to the party in whose favour it is imposed. Both the duration and the extent of the covenant will be considered.

Proposed changes to non-compete clauses

Back in 2020, a consultation exercise was undertaken by the Government which outlined various options for reforming the laws relating to non-compete clauses, but primarily focused on:

However, fast-forward to 2023 and the recent proposal, it appears the Government has, in fact, decided on an alternative option that limits the period of a non-compete clause to three months.

The Government has stated that by capping the duration of non-compete clauses to three months it will provide roughly five million UK workers with enhanced freedoms to change jobs or start up their own businesses.

The proposals will not impact any wider non-solicitation clauses (such as an ex-employee poaching a former colleague to join them at a rival enterprise), paid notice periods, and garden leave clauses. Further, the proposals will not change confidentiality clause arrangements and the restrictions on former public sector workers under the business appointment rules.

What impact could the reforms to non-compete clauses have?

Since the announcement from the Government, many experts have commented that capping the duration of non-compete clauses could detrimentally impact some employers as it will obviously allow ex-employees to join rival companies much sooner. Certainly, many employers currently rely on non-compete clauses with longer periods of prohibition.

In an attempt to get around the changes, many employers may decide to implement longer notice periods in their contracts of employment, to allow them to potentially place workers on prolonged gardening leave when they resign. This will have cost implications though as notice would have to be paid.

Employers may also decide to audit their current practices insofar as they relate to the protection of confidential information – not only by ensuring that robust confidentiality provisions are included in their employment contracts – but also by taking practical steps to further limit access to confidential information by employees where not strictly needed. Whilst always recommended, the proposed reforms emphasise the need for such steps.

Further, employers may also include other restrictive covenants in their employment contracts which won’t be impacted by the Government’s proposed reforms.