Government proposals may result in your non-compete clause becoming void
On 10 May 2023, the government published a policy paper entitled Smarter Regulation to Grow the Economy.
It is a mix of the government’s vision for delivering an improved regulatory framework and covers a number of proposed changes to employment law, one of which is about restrictive covenants, specifically, non-compete clauses.
This article covers the changes proposed to non-compete clauses that are commonly included in employment contracts.
We last wrote about restrictive covenants a few years ago, where we explained the principles of restrictions and why you, as an employer, might want to use them.
Here is a link to the article, which talks about the use of restrictions in employment contracts and the various points to consider when including them.
To recap, a restrictive covenant (also referred to as post termination restriction) is any element of a contract that aims to restrict an employee’s activities after termination. Typically, they include the following types of restriction:
- working for a competitor or setting up a rival business
- contacting clients directly
- dealing with clients who contact the employee personally
- poaching staff
- interfering with the company’s relationship with its suppliers
These types of restrictions can be considered as an unfair burden on the employee because it could hinder their search for new employment.
However, courts recognise that employers who have invested in their staff and shared their most confidential information with them, can legitimately seek to be protected from former employees using the investment or knowledge against them.
While they can be useful tools for employers wanting to protect their business interests, our experience is that they are often misused by being applied too widely, for too long, or on staff who are too junior to be a threat.
Instead of legitimately protecting your business, they end up being simply unenforceable. This is particularly true for non-compete clauses, which are the clauses that attempt to restrict an ex-employee from working with your competition.
The new proposal
The government’s policy paper says:
‘Non-compete clauses are included in employment contracts to restrict an individual’s ability to work for or establish a competing business after they have moved on from a job. They can play an important role in protecting businesses who invest in their staff, but unnecessarily burdensome clauses have become a default part of too many employment contracts, including where they fulfil no purpose. This can inhibit workers from looking for better paying roles, and limit the ability of businesses to compete and innovate.‘
The policy paper goes on to say that the government intends to restrict non-compete clauses to three months. The government’s rationale is that this will give up to 5 million employees greater freedom to switch jobs, apply their skills elsewhere and, as they put it ‘even earn a pay rise’.
Non-compete clauses are the most difficult to enforce, as you have to be able to show that stopping an ex-employee from working with the competition for a period of time (or setting up in competition) is necessary to protect the business from harm and there are no other, fairer ways of doing so.
For most roles, employers get sufficient protection from preventing ex-employees from poaching or working with clients post termination. However, people in certain positions such as marketing or finance may have access to market sensitive information whilst having no contact with clients.
The proposed restriction on the length of non-compete clauses will not affect employers’ rights to use notice periods as gardening leave (where the employee stays at home without contact with the business throughout the length of the notice period), or to use non-solicitation clauses.
The reforms will also not interfere with confidentiality provisions. So, the main result of the proposed change is that your three month non-compete clause is likely to be shorter than your non-solicitation and non-dealing clauses.
We are unconvinced that limiting the length of non-compete clauses will see up to 5 million employees having greater freedom to move, as most employees with non-compete clauses will also have other, potentially much more powerful restrictions in their current contracts of employment.
Review your contracts
At the moment, there is no time frame for the necessary legislation to be introduced and all the policy paper says is that ‘the government intends to legislate when parliamentary time allows’.
In the meantime, we would encourage you to review any restrictive covenants in your contracts of employment. Are you using them to their best effect? Are you applying them to the right roles in your business? Are they for reasonable periods?
One of the important points which is unanswered is how the new law will affect existing non-compete clauses. If your contract contains a six month non-compete clause will the clause be void or will it be replaced by a three month non-compete clause?
If you need to issue a contract of employment before new legislation comes into effect, we recommend that you talk to us.
If you would like to discuss the options and potential pitfalls around this, or any other employment law subject, we would be delighted to speak to you.
For more specific information or to discuss your requirements please call either Amanda Galashan or Julie Calleux at Employease on 03339398741, or email us at email@example.com. This note does not constitute legal advice on any particular situation you may have.
Copyright: Employease 2023