30th May, 2023

Non-Compete Clause Rule Changes: What Employers Must Know

A non-competition restriction, a form of restrictive covenant also known as a "non-compete" clause, prevents employees from joining rival companies for a certain period after they leave their current job. It has been described as “the most powerful weapon in an employer's armoury” (Underhill LJ in Patsystems Holdings Ltd v Neilly [2012] EWHC 2609). The power of this tool could be fading as the UK Government has proposed limiting the duration of non-compete clauses to a maximum of three months.

 

Presently, in the context of operating businesses in England and Wales, non-compete clauses must adhere to certain requirements. They should be limited to what is reasonably necessary, apply to a reasonable geographical area, have a reasonable duration, and primarily serve to safeguard legitimate business interests. The proposed change will introduce an additional strict limit on the enforceability of these post-termination restrictions.

 

The proposed amendments will not have an impact on broader non-solicitation clauses, which prohibit former employees from enticing clients or staff members. Similarly, non-dealing clauses, which restrict their interaction with previous clients, as well as paid notice periods and garden leave clauses, will remain unaffected., Confidentiality clauses will not undergo any changes, despite the inherent difficulties in enforcing them. It is important to note that these changes will not extend to LLP and partnership agreements, as well as sale and purchase agreements, so there is no need to make adjustments in those areas.

 

Under this policy, employers may take advantage of the situation by increasing the utilisation of garden leave clauses. These clauses have the potential to surpass non-compete restrictions and can be combined with a three-month non-compete period.

 

In cases where an employee simultaneously enters into both an LLP (Limited Liability Partnership) and an employment contract with the same organization – a scenario that is not uncommon among senior individuals in specific industries – it is probable that non-compete clauses lasting longer than three months can still be included in the LLP documents.

 

The effect of these proposals on settlement agreements remains uncertain. Employers may still engage in negotiations to include additional non-compete provisions as part of a settlement, often accompanied by an additional financial compensation. The government's proposal does not explicitly address this particular aspect. However, given that the proposed limitation specifically applies to employment contracts and worker contracts, settlement agreements might potentially be exempt from the restrictions. Similarly, longer non-compete clauses could potentially be incorporated into documents related to bonuses, LTIPs (Long-Term Incentive Plans), and other shares or incentive schemes.

 

Employees will still need to demonstrate that their non-compete agreements are proportionate and necessary to justify imposing such restrictions on them. Employers cannot assume that non-competes lasting three months or less will automatically be enforceable without a legitimate business need underlying them. Justification for the non-compete will still be a crucial factor in determining enforceability.

 

Employees will continue to be required to provide evidence that their non-compete agreements are reasonable and essential in order to justify the imposition of such restrictions on them. Employers cannot simply assume that non-compete clauses lasting three months or less will automatically be enforceable unless there is a legitimate business necessity behind them. The justification for implementing the non-compete restriction will remain a crucial element in determining its enforceability.

There are also some potential oddities caused by only changing one type of restriction. For instance, in the case of an ex-employee holding a sales or business development position, they may be permitted to join a competitor after a three-month period due to the limitation on non-compete clauses. However, they could still remain bound by ongoing non-solicitation and non-dealing clauses, which restrict their ability to solicit clients or engage with past clients. This discrepancy could potentially create a situation where the individual is effectively hindered despite being technically allowed to work for a competitor.

 

The specific timeline for implementing this policy has not been specified, and it is expected to occur "when parliamentary time allows." This may still be a considerable amount of time away, as it is dependent on the availability and prioritization of parliamentary resources and schedules.

 

The policy being discussed is a direct response to a government consultation paper released in 2020, which aimed to address reform in this particular area. The paper presented two potential options for consideration: either allowing post-termination non-compete clauses in employment contracts only if the employer provides compensation (likely a percentage of the employee's basic salary) during the restricted period or rendering all post-termination non-compete clauses in employment contracts null and unenforceable. These proposed changes are certainly more drastic compared to the current proposal, which appears to necessitate a shift in how employers safeguard their business interests.

 

Employers are strongly advised to thoroughly assess the implications of these changes on their businesses, both in the immediate future and in the long term. It would be prudent to carefully review and revise contractual agreements to ensure they remain relevant and in line with the evolving regulatory landscape. By taking proactive steps to amend these agreements, employers can effectively adapt to the potential impacts of the new regulations and safeguard their interests accordingly.



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