The Government announced back in May 2023 that it planned to legislate to limit non-compete clauses to 3 months post-termination of employment. However, despite that, there have been no further developments since that announcement, and it appears unlikely that anything will happen this side of a general election
Nevertheless, should the proposal to limit non-compete clauses to 3 months post-termination of employment be implemented, what can firms do to protect their legitimate business interests?
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. 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.
Government Consultation
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 and then made the announcement that it planned to legislate to limit non-compete clauses to 3 months post-termination of employment.
Limit To 3 Months Post-Termination Of Employment
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.” 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-poaching / non-dealing clauses, and it is not yet known whether the limit on non-compete clauses will be applied to restrictive covenants within existing contracts of employment
Protecting Business Interests Should A 3 Month Limit Be Implemented
Should the proposal to limit non-compete clauses to 3 months post-termination of employment come into force, what can firms do to protect their legitimate business interests?
The following represents some of the measures that can potentially be deployed:-
- Longer Notice Periods And Garden Leave: Businesses can effectively offset a shorter non-compete restriction by increasing the notice period the employee has to serve, part or all of which can be served on garden leave. For instance, an employee subject to a 3 month non-compete clause, but who is also on a 6 month notice period, would effectively be prevented from working in competition with the firm for 9 months. Moreover, the prospect of a long notice period can deter employees from leaving in haste. Such notice periods also provides a buffer for firms to manage transitions and secure replacements. Nevertheless, longer notice periods, especially where part or all of it is to be spent on garden leave, is potentially extremely expensive for employers (i.e. as they would be paying the employee to do nothing for longer) and can lead to decreased morale if employees feel 'imprisoned' in their roles, potentially reducing productivity. Additionally, it could deter potential talent, who may view extended notice periods as restrictive when considering job offers.
- Enhancing Other Restrictive Covenants: The proposed new three-month restriction specifically relates to non-compete obligations. It therefore does not extend to other forms of restrictive covenants such as those preventing poaching (i.e. of clients and employees) and dealing. Therefore, even though an individual may be able to move to a rival company after the three-month period, companies still have the ability to curtail how effective their former employee can be in their new role through carefully constructed non-poaching and non-dealing restrictive covenants.
- Strengthening Confidentiality Agreements: Although non-compete clauses may be curtailed, confidentiality agreements remain a robust tool for employers. By enhancing the terms of confidentiality and non-disclosure agreements (NDAs), employers can ensure that sensitive information such as client lists, business strategies, and proprietary processes are protected. These agreements can last indefinitely, beyond the term of employment, and can provide a legal basis to prevent former employees from using confidential information in their new roles.
- Investing in Training and Development: Employers can invest more resources in training and development programs that include longer-term commitments from employees. By creating advancement opportunities tied to learning new skills or gaining certifications, businesses can encourage loyalty and lengthen tenure within the company. These programs can include stipulations that require repayment of training costs if an employee leaves within a certain time frame after receiving training, which may deter them from jumping ship too soon.
- Crafting Roles with Unique Specializations: Designing job roles with unique specializations or niche skill requirements makes it harder for employees to find direct competitors who could benefit from their specific expertise. By doing so, employers create a natural barrier to immediate transition into a competing business since fewer companies would have use for such specialized knowledge or abilities.
- Fostering A Positive Work Culture: One of the most effective long-term strategies is cultivating a work environment that employees do not want to leave. By focusing on employee engagement, recognition, and providing a positive workplace culture, businesses can reduce turnover rates overall. When employees feel valued and see potential for growth within their current company, they are less likely to seek opportunities with competitors.
- Shareholder / Partnership Agreements: It is not yet known whether the proposal to limit non-compete clauses to 3 month post-termination of employment will ultimately apply only to contracts of employment, or whether they will also be extended to shareholder / partnership agreements. If they are not extended to shareholder / partnership agreements, then employers have the option of imposing non-compete clauses for longer than 3 months where the individual (usually a senior employee) will be entering into a shareholder / partnership agreement
- Settlement Agreements: It is not yet known whether the proposal to limit non-compete clauses to 3 month post-termination of employment will ultimately mean that employers are prohibited from extending the 3 months to a longer period via a settlement agreement. If they are not debarred from doing that, then that is an additional option that will be available to employers to legitimately circumvent the limit on non-compete clauses, although it would potentially involve some considerable additional expense. This is because employees would in most cases seek to be compensated in return for agreeing to a longer non-compete restriction within a settlement agreement.
Looking To The Future
While the potential limit on non-compete clauses presents challenges for employers, it also opens up avenues for innovative workforce management strategies. By focusing on confidentiality agreements, notice and garden leave policies, investment in employee development, creating specialized roles, fostering positive workplace cultures, and other measures, businesses can protect their interests without relying solely on non-compete clauses. Adapting to these changes will require careful planning and legal consideration, but offers an opportunity for companies to strengthen their teams and competitive edge in this new landscape.
