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The International Data Insights Report: Trends in international arbitration
Mark Fallmann
On 10 May 2023, the Department for Business and Trade published a policy paper entitled, “Smarter Regulation to Grow the Economy” announcing, among other things, the Government’s intention to limit the period of non-compete provisions in employment contracts to three months.
Two days later, the Government finally issued its response to the consultation it had launched in December 2020 on proposed measures to reform post-termination non-compete clauses in employment contracts (the consultation had closed on 26 February 2021). That response echoed the Government’s intention to introduce a statutory limit of three months on the length of non-compete clauses. This is particularly interesting since the two main options for reform set out in the consultation were: (1) to make non-compete clauses in employment contracts permissible only where the employer provides consideration for the period of the restraint; or (2) making all post-termination non-compete clauses in employment contracts void and unenforceable. Despite the majority of respondents to the consultation being in favour of the first option, the Government has opted for this alternative approach.
Although the Government’s proposal to reduce non-compete clauses to three months may seem surprising at first glance, it is in line with practice in other western jurisdictions where non-compete clauses are either outlawed outright or remunerated.
In France, for example, non-compete clauses must meet similar reasonableness criteria as to scope and length as under English law, but it is also a condition of their enforceability that they are reasonably remunerated. In the US where many states already ban or severely limit non-compete clauses, the Federal Trade Commission is looking to ban them altogether.
Multinational employers are already familiar with the concept that in order to prevent unfair competition by valuable departing employees, it is necessary to remunerate the restraint. In the UK, we are therefore likely to see employers rethink the length of notice periods for key employees and the use of garden leave provisions, particularly since there are no proposals to limit their use.
So far, the proposal only applies to non-competes in employment so, on the face of it, non-compete clauses in other contracts such as share sale agreements, investments employee shareholders agreements or LLP agreements will not be subject to the same three-month limitation. It may well be that employers continue to include longer restrictions in those documents if it is felt that a three-month restriction is not enough to protect their legitimate business interests. This would be a particular consideration in relation to senior individuals in the business and not a major change since it is not uncommon for such individuals to have parallel incentive or other agreements alongside their employment contract.
It also worth remembering that non-compete provisions are just one type of post-termination restriction / restrictive covenant that may be used by employers to protect their business interests when an employee leaves. There are, at present, no proposals to introduce similar limits in relation to non-solicitation and non-dealing clauses in employment contracts. That is, clauses which seek to prevent individuals soliciting the customers/clients and/or key members of staff of their former employer, or dealing with such individuals for a certain period post termination of employment.
Given the Government’s stated intention to pass the proposed legislation “when parliamentary time allows” and an upcoming election in 2024, it is unlikely that anything will change anytime soon. Nevertheless, it is advisable for employers to consider enhancing the confidentiality provisions in their employment contracts and to think more carefully about ensuring that their clauses on non-solicitation and non-dealing are well thought through so that they can be enforced in court and adequately protect their business interests in the absence of non-compete provisions lasting more than three months.
FURTHER INFORMATION
If you have any questions or comments about the topics discussed in this blog, please contact Emmanuelle Ries or any member of the Employment team.
ABOUT THE AUTHOR
Emmanuelle Ries is recognised as a specialist of employment issues arising in cross border situations. She provides support to corporate clients with day-to-day employment law advice from recruitment, contractual and secondment documentation to issues arising at the end of the employment relationship. Emmanuelle is bilingual in English and French.
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