Strict Limits For Non-Compete Clauses On The Horizon
What’s the latest on proposals to regulate non-compete clauses and how should businesses be preparing? After years of talk, it looks like reliance on non-compete clauses will become strictly limited – but not banned outright (which was considered).
A non-compete clause is a restrictive covenant within an employment contract (or settlement agreement) restricting the employee from competing with the employer for a period of time (fixed in the contract) after the employment relationship ends. An unreasonable clause may be unenforceable at common law, eg if it contains an excessive time limit.
New rules around non-compete clauses have been anticipated for some time, not least because there are no statutory provisions governing them.
In its report published in May, the DTI has detailed its proposed reforms of non-compete clauses. (It also sets out proposals for working time and TUPE). The report followed a government consultation that closed early 2021. The government promptly published its response setting out its intentions:
· It will introduce a statutory limit of 3 months on the length of non-compete clauses
· This will apply only to non-compete clauses, contracts of employment and limb(b) worker contracts
· When a non-compete clause does not exceed the 3 months statutory maximum, it is the intention that common law principles should continue to apply. The starting point is that restrictive covenants restraining trade are unenforceable, unless shown to be reasonable.
An outright ban on such clauses was rejected because (says Government) it would remove the freedom of negotiation between employers and workers and a total ban could have “unintended consequences”.
Questions remain: will the introduction of new rules be retroactive? And if not, how will existing non-compete clauses be treated by businesses and those subject to them?
It is also unclear whether new non-compete clauses specifying a time period in excess of 3 months would automatically be treated at common law as unreasonable and unenforceable – or capped at the maximum 3 months (we would assume the former would apply).
Ahead of these changes, businesses may be prudent to consider reviewing any non-compete clauses currently ‘live’; and re-consider the terms of any future non-compete clauses in view of anticipated changes. No time-scale for change has yet been set out.
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