The government has announced plans to limit the length of non-compete clauses to a maximum of three months.
Non-compete clauses are a type of post-termination restriction (also known as “restrictive covenants”) that seeks to restrict an individual’s ability to compete with their former employer for a defined period after the end of their employment.
Post-termination restrictions are currently governed by case law. Precedent states that such restrictions will only be enforceable if they are no wider than is reasonably necessary to protect a legitimate business interest of the employer, such as customer connections, a stable workforce or confidential information. Importantly, if a post-termination restriction is too wide, or unnecessary in the circumstances, it will be unenforceable. However, there are currently no fixed rules about how long a non-compete must be to be potentially enforceable and some can be as long as 12 months.
The government now plans to introduce a three-month statutory cap on the length of non-compete clauses. The rationale behind this is to provide more flexibility for employees to upskill, join competitors or start up rival companies; increase employer’s opportunity to recruit talent; and generally boost the UK economy.
Although the length of non-compete clauses would be limited to three months, this will not mean that any non-compete that is three months or less will automatically be enforceable. Employers will be subject to the same rules if they wish to rely on a non-compete clause, and will be required to demonstrate that the restriction is not too wide, and it is reasonably necessary in order to protect a legitimate business interest.
Interestingly, it is proposed that there will be no change to non-solicitation, non-dealing, paid notice periods, garden leave or confidentiality clauses and it is likely that employers may look to utilise these clauses to prevent post-termination competition instead. In fact, it may be that a greater use of garden leave clauses has the reverse effect on employee flexibility and economy boosting, as such clauses effectively prevent an employee working at all in their notice period regardless of whether the business they would conduct if permitted would be in competition.
There are still many unanswered questions. It is unclear how the new legislation will affect non-compete clauses that exceed three months in existing employment contracts, and whether this rule will apply to additional non-compete clauses that are agreed as part of a settlement agreement.
Although we do not yet know when this three-month limit will be implemented, employers may wish to review their current post-termination restrictions and seek to tighten other restrictive covenants, such as non-solicitation and non-dealing, to ensure that business interests will remain protected.
If you are an employer and would like further guidance or support with reviewing your post-termination restrictions in employment contracts, or an individual who would like to better understand their position in relation to a contractual non-compete clause, please feel free to get in touch with the team.
Jones Chase is a specialist employment law firm based in the centre of London with an excellent track record of looking after those that we assist.
Do contact us should you require further information or need any assistance. We are always happy to speak to people and point them in the right direction.