The UK government has announced that it will bring in legislation to restrict the post-employment non-compete restraints to three months. This is a significant proposal as currently non-compete restrictions in the UK are generally capable of being enforced for a period up to 12 months (if they are “no more restrictive than is reasonably necessary to protect the employer’s legitimate business interests’’). Whilst this means a 12 month period will usually only be appropriate for very senior employees, in practice non-competes are commonly expressed to apply for six or nine months post-termination.
The announcement comes following a government consultation, in which they had proposed either requiring payment for the duration of a non-compete in order for it to be valid (as is the case in many European countries), or limiting the use of non-competes. The expectation was that either no changes would be made, or would there be a requirement for extra payment. This new cap on the length of non-competes was not expected.
The government announcement came as part of a series of regulatory reform proposals intended to reduce regulation for businesses post-Brexit. It is brief, but references some further details on the new statutory three month limit, including that:
- Employers will still be able to restrict activities during (paid) garden leave or notice periods, during which employees are still employed and on payroll – the three month limit will only apply to post-termination non-competes;
- Confidentiality provisions and other types of post-employment restrictive covenants, such as non-solicit and non-dealing restraints, will not be affected by the new statutory limit;
- The reforms will not be extended to cover non-competes in other types of contracts, such as shareholders’ and partnership agreements – however, in practice these are often part of an employment relationship, so this might not be such a simple distinction to make.
There are a number of important details missing and questions left unanswered in the announcement. Significantly, it is currently unclear how the new statutory limit will apply to existing non-competes that exceed three months – will they now be unenforceable, amended down to apply for three months only or judged under the rules applicable at the time the contract was signed? Given recommended UK practice in offer letters is to offset garden leave against non-competes, this could leave employers with no post-termination protections where an employee has a three-month notice period, as is often the case for senior employees. What about restraints for which an employees has received a significant payment or benefit, for example in an LTIP or RSU agreement? And when will the new legislation be introduced, if at all? The announcement says this will be “when parliamentary time allows” which might well not be before the next election, with no guarantees as to whether a new government would take this forward.
In the meantime, there is significant uncertainly as to what employers should be doing – both in terms of whether they need to amend existing employees’ covenants, and also offers to new hires. For now, we recommend that companies continue to include non-competes where they feel other restrictions do not give enough protection, but include these within a fuller set of protections. These could include non-dealing and non-interference restraints, non-solicits, longer notice periods which could be used to enforce garden leave and tailored confidentiality restrictions. And we already see a trend towards building retention arrangements, such as RSUs, which may offer a potentially safer ‘home’ for a non-compete restriction for senior employees.
Please contact any of the London employment team for any questions on your UK, or International, business protection strategy.