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Time to review contractual non-compete clauses

Our Employment team share their thoughts on the government’s proposal to limit non-compete clauses in employment contracts to three months.

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Published 22 May 2023

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In its policy paper Smarter Regulation to Grow the Economy published on 10 May, the government is proposing to limit non-compete clauses in employment contracts to three months.

A non-compete clause is one type of a “restrictive covenant” that an employer may wish to include in a contract of employment to restrict an employee or worker’s activities post-termination of their employment. Generally speaking, a contractual term which seeks to restrict an employee’s activities after termination is void for being in restraint of trade and contrary to public policy. Such clauses in employment contracts are also usually viewed more strictly than those in commercial contracts due to the unequal bargaining position between employer and employee, and so are less likely to be regarded as reasonable and enforceable.

In order for such a clause to be enforceable, the employer needs to show that it has a legitimate business interest to protect, and that the protection sought is reasonable having regard to the interests of the parties and the public interest. Examples of legitimate business interests typically include the employee’s trade connections (with customers, clients or suppliers) and goodwill, confidential information and trade secrets, and maintaining the stability of the workforce. The restrictions in such a clause must also be no wider than is necessary, so the employer should consider carefully both the geographical area and time limit of the non-compete restrictions.

That being said, there is currently no statutory time limit on the duration of non-compete clauses in employment contracts. Non-compete restrictions of between three and twelve months are not uncommon depending on the seniority, experience and importance of the employee or worker. Anything over twelve months is unlikely to be enforceable.

The policy paper makes clear that the government intends to cap the time limit on non-compete restrictions to three months. The hope is that this will give up to five million UK workers  greater flexibility in joining competitors or starting up rival businesses. It is also anticipated that this change will be beneficial to the wider UK economy by widening the talent pool, and improving the quality of candidates that employers can hire to grow their businesses.

At this stage it is unclear whether the proposals will apply to non-compete clauses in existing employment contracts that are longer than the proposed three month cap, and whether the proposed legislation will apply to other types of contracts that typically contain non-compete clauses. Interestingly, the policy paper states that there are no proposed changes to wider non-solicitation clauses in employment contracts.

These proposed changes will require primary legislation to go through parliament but we recommend that employers should start to revisit contractual restraint of trade clauses now and be prepared for what comes next.

For more information, please visit our Employment Lawyers page.

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Longer Reads

Time to review contractual non-compete clauses

Our Employment team share their thoughts on the government’s proposal to limit non-compete clauses in employment contracts to three months.

Published 22 May 2023

Associated sectors / services

Authors

In its policy paper Smarter Regulation to Grow the Economy published on 10 May, the government is proposing to limit non-compete clauses in employment contracts to three months.

A non-compete clause is one type of a “restrictive covenant” that an employer may wish to include in a contract of employment to restrict an employee or worker’s activities post-termination of their employment. Generally speaking, a contractual term which seeks to restrict an employee’s activities after termination is void for being in restraint of trade and contrary to public policy. Such clauses in employment contracts are also usually viewed more strictly than those in commercial contracts due to the unequal bargaining position between employer and employee, and so are less likely to be regarded as reasonable and enforceable.

In order for such a clause to be enforceable, the employer needs to show that it has a legitimate business interest to protect, and that the protection sought is reasonable having regard to the interests of the parties and the public interest. Examples of legitimate business interests typically include the employee’s trade connections (with customers, clients or suppliers) and goodwill, confidential information and trade secrets, and maintaining the stability of the workforce. The restrictions in such a clause must also be no wider than is necessary, so the employer should consider carefully both the geographical area and time limit of the non-compete restrictions.

That being said, there is currently no statutory time limit on the duration of non-compete clauses in employment contracts. Non-compete restrictions of between three and twelve months are not uncommon depending on the seniority, experience and importance of the employee or worker. Anything over twelve months is unlikely to be enforceable.

The policy paper makes clear that the government intends to cap the time limit on non-compete restrictions to three months. The hope is that this will give up to five million UK workers  greater flexibility in joining competitors or starting up rival businesses. It is also anticipated that this change will be beneficial to the wider UK economy by widening the talent pool, and improving the quality of candidates that employers can hire to grow their businesses.

At this stage it is unclear whether the proposals will apply to non-compete clauses in existing employment contracts that are longer than the proposed three month cap, and whether the proposed legislation will apply to other types of contracts that typically contain non-compete clauses. Interestingly, the policy paper states that there are no proposed changes to wider non-solicitation clauses in employment contracts.

These proposed changes will require primary legislation to go through parliament but we recommend that employers should start to revisit contractual restraint of trade clauses now and be prepared for what comes next.

For more information, please visit our Employment Lawyers page.

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