New future limitations on non-compete clauses in employment contracts

As outlined in our previous guide, there are a variety of clauses that a business can include in employment contracts and/or agreements to protect, amongst other things, its confidential information, client lists, and other employees.

One of these clauses are non-complete clauses, which restrict a departing employee from joining a competing business for a period of time. As mentioned in our previous guide, the scope of such clauses (along with the other types of restrictive covenants) must be reasonable in scope, and protect legitimate business interests.

For some time, non-compete clauses have been critiqued for being too restrictive and unfair on departing employees, as it prevents them from obtaining work in a competing (and therefore likely to be a similar) business for a set period of time. Therefore, in 2020 the government published a consultation paper exploring options for potential reform. This included the following two alternatives:

1. Making post-termination non-compete clauses permissible only where the business provides compensation for the period of restraint.
2. Making all post-termination non-compete clauses void and unenforceable.

In May 2023, two-and-a-half years after it published its consultation paper, the government published its response. Within the response, the government outlined pros and, more substantially, cons of each option with some of the main points being:

1. Requiring businesses to pay for the period of restraint would apply a “substantial direct cost to businesses” particularly during the current time of economic recovery and cost of living crisis.
2. Making such clauses void and unenforceable could lead to “unintended consequences” including concerns for investors and difficulty in aligning incentives between workers and employers.

Ultimately, the government decided against recommending either of the above options and instead put forward a further option, namely limiting post-termination non-compete clauses to three months. This would be implemented via legislation when “parliamentary time allows”.

It is therefore important for businesses and employers to be mindful of these future changes when inserting non-compete clauses into contracts and agreements. For the time being, the government’s recommendations have not become law and are unlikely to become law for some time due to the steps that need to be taken to make that so. However, to make sure your business’ practices comply with these new rules when they do become law, it would be prudent to only include non-compete clauses that do comply with the rules, should you wish to include such clauses, or considering alternative methods of protecting your business and its assets.

If you and/or your business have any queries regarding these proposed changes, do not hesitate to contact Geldards LLP’s expert Commercial Disputes Resolution and Employment teams who can assist you.