Employers’ rights to control post-employment competitive activities are about to become weaker!

Laws are to be introduced to control non-compete restrictions

Earlier this month, as part of a drive to encourage economic growth the government announced that rules to limit the use of non-compete restrictions in contracts of employment to a period of three months will be introduced. This will apply to employment and worker contracts.

Non-compete restrictions are one of several different types of post-termination restrictions that an employer has to hand in a contract of employment to protect its business when an employee leaves. These restrictions are however not enforceable unless the employer can show they are no wider than are reasonably necessary to protect the employer’s “legitimate business interests” – in effect, they are a tool to protect the organisation’s confidential information, the integrity of its workforce and its client connections.

Employers are already aware that a non-compete restriction is notoriously difficult to enforce, as it is often difficult to show that it is proportionate in light of the impact it has on an employee’s ability to look for other work. It is this impact the government wants to address as it considers it creates limitations within the labour market and hinders innovation and entrepreneurship.

Why have a statutory cap?

One factor that always forms part of any assessment as to whether a non-compete restriction should be struck down as unreasonable is the duration of the restriction. Usually, restrictions are for between three and six months but in certain business sectors they can be 12 months or more.

The government has decided to cap any non-compete clause to three months.

Less attractive options for employers, including banning non-compete clauses outright and introducing the payment of compensation for the duration of the restriction were rejected.

Will other post-termination restrictions be affected?

Employers will still be able to have the security of other forms of contractual protection in the guise of non-solicitation, non-dealing or non-poaching clauses and confidentiality obligations; these will not be subject to the three-month cap.

Is the change in law as simple as it appears?

It has taken two years for the government to share its views and legislation will need to be introduced to make the three-month cap law. At this stage there are a number of important issues that remain to be addressed:

• Will existing non-compete restrictions exceeding three months need to be redrafted or will they be rendered invalid?

• Will any attempt to introduce restrictions of longer than three months in the future be void or only valid for three months?

• Will current or new non-compete restrictions of three months or less be automatically valid or will an employer still need to show that the duration is reasonable?

• How will non-compete restrictions in settlement agreements be affected?

Are there any other issues the new law will create?

The following are some of the key considerations arising from the planned change in law:

• Contracts of employment are likely to contain longer notice periods and consequently longer periods of garden leave. Oddly, this would be contrary to the government’s aim of mobilising the country’s workforce as it may keep employees out of the job market for longer. There will also be a cost to the employer in keeping an employee on garden leave for longer.

• The continuation of non-solicitation and non-dealing restrictions for longer periods than the non-compete clause will lead to an anomaly – there will be cases of individuals working for competitors who are unable to perform their roles.

• There will be a greater reliance on separate non-disclosure and proprietary rights agreements alongside simple contractual clauses. The more contractual documentation, the greater the risk of a legal dispute.

• Roles that are involved in managing client relationships, handling confidential information or undertaking research and development may be relocated overseas in a legal jurisdiction that looks more favourably on non-compete clauses.

Should current contracts be amended?

Before the three-month cap is introduced the law will need to change, so for the time being employers can continue to use non-compete clauses as they are because we do not know when the new law will be published. It is understood this will be “when parliamentary time allows”.

While there is no immediate need to update current contracts, the more pressing consideration for employers is to understand how this legal change will impact on the current protection its non-compete restrictions give their businesses. The aim will be to identify the level of risk and the best options for managing the risk. In our previous article, “Building a shield against non-compete” we discussed some of the key considerations for assessing risk and other ways of protecting a business without non-compete restrictions; these considerations would apply equally here. Even if the battle against competition may become more limited, there are other options available to employers to protect their organisations, including having sound strategies to retain staff and deter them from leaving, which could all be used to good effect against the battle of individuals engaging in competition with their former employers.

If you need further advice about protecting your business when an employee leaves your business, please feel free to call us on 0808 172 93 22 for a no obligation discussion.

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This update is for general guidance only and advice should be taken in relation to a particular set of circumstances.