The Government have announced plans to legislate to limit the duration of post-termination non-compete clauses to 3 months.
Non-Compete Clauses
It is part of the implied duty of fidelity contained in all contracts of employment, that the employee must during the course of their employment not compete with their employer, and must serve their employer with good faith, loyalty, and with regard to the employer’s best interests.
Restrictive Covenants
However, the implied duty of fidelity does not extend to the period post termination of employment. Hence, should an employer wish to limit the extent to which the employee can work for a competitor for a period of time post termination of employment (usually between 3-12 months), then an express non-compete clause would need to be included as a restrictive covenant within the employee’s contract of employment.
Enforceability
However, employers need to exercise caution when drafting non-compete clauses, as should they be drafted too widely in a manner that goes well beyond just protecting the employers legitimate business interests, then the employer runs the risk that the non-compete clause constitutes a restraint of trade, and of being declared void and unenforceable.
Government Consultation
Nevertheless, as we highlighted in a previous article, the Government launched a consultation on whether their needs to be reform of post-termination non-compete clauses on the 4th December 2020. That consultation closed on the 26th February 2021. The Government finally issued its formal response to the consultation on the 12th May 2023.
Options Considered
The Government's consultation was launched as part of the Government’s “build back better” plans. The Government’s position is that there is a need to promote a more entrepreneurial culture, particularly in the area of the next generation of emerging technologies, such as advanced robotics, artificial intelligence, the Internet of Things, 3-D printing, automation, and blockchain. As non-compete clauses are a barrier to competition, the Government take the view that reform of them, or even their abolition, could help to nurture more start-up businesses.
As well as the option of a complete ban, another measures under consideration as part of the consultation was a requirement to pay / compensate the employee for the duration of the non-compete restriction. Another option was to impose a statutory limit on how long the restrictions imposed by any non-compete clauses can last for. An added benefit of such reforms, the Government suggested, is that they will deter employers from including “unnecessary” non-compete clauses in employment contracts.
The Government's Proposals
In its formal response to the consultation, the Government stated that it will "introduce a statutory limit on the length of [post-termination] non-compete clauses of 3 months."
3 Month Limit
The Government added that this measure will "boost flexibility and dynamism in the labour market, and...bring down the cost of living by unleashing greater competition and innovation. It will make it easier for workers, including those who are highly skilled, to be able to move to a competitor or to start a competing business."
No similar limits will be applied in terms of non-solicitation / non-poaching clauses.
Potential Problems With Proposal
Nevertheless, there are some potential problems with these proposals. For example, employers may decide that where they need to prevent certain employees moving into competition with them too quickly upon leaving, then they should be placed on longer notice periods. That way, that employee could be placed on garden leave for a longer period of notice and the 3 month post-termination non-compete clause would only kick in upon termination of employment at the end of the garden leave period. Hence, for an employee on a 6 month notice period, they can therefore effectively be prevented from going into competition with the employer for 9 months.
The counter-argument to that, however, is that the employer will have to pay the employee to serve out the longer notice period. Are employers really going to do that, except for those employees who will present the greatest risks in terms of going into competition with the employer too quickly? Hence, in all likelihood, the extra costs involved in funding longer notice periods means that only a small minority of employees will end up with longer notice periods compared to now.
Nevertheless, some employers will feel the need to fund longer notice periods in some cases, and the extra costs involved in that may prove counter-productive in terms of the Government stated aim of "unleashing greater...innovation."
Right Balance
Nevertheless, overall, the proposal to limit non-compete clauses to 3 months post-termination of employment strikes the right balance between the interests of employers and employees, and in terms of promoting competition and innovation in the wider economy. The extra costs involved in funding longer notice periods means that very few employees will face prolonged notice periods, and for those that do have to serve out longer notice periods, they will at the very least be compensated for them in terms of continuing to be paid for the period in question.
