Government to regulate duration of non-compete clauses

News  |   15 August 2023

In the first of a series of anticipated regulatory reform packages, Kemi Badenoch, The Secretary of State for Business and Trade, has announced proposals for change to several areas of employment law. The intended reforms – outlined in a policy paper published on 10 May 2023 entitled Smarter Regulation to Grow the Economy – are seen as key to the Prime Minister’s mission to boost the economy.

One among them is an intention to limit the duration in which non-complete clauses in employment contracts can restrict employees to 3 months.

Employers sometimes include non-complete clauses restricting employees’ freedom to join a competitor post-termination for longer periods, commonly 6 months, especially where the employer seeks to protect its legitimate business interest. The government considers restrictions longer than 3 months to be overly restrictive and unnecessarily burdensome, stifling competition and disproportionate to the outcome employers seek to achieve.

The government’s aim is to help to generate a more dynamic labour market by giving employees more flexibility to join a competitor or start up a rival business when their employment comes to an end. It claims the reform will give up to 5 million workers greater freedom to switch jobs, apply their skills elsewhere and even earn a pay rise; and will boost the wider UK economy, supporting employers to grow their businesses and increase productivity by widening the talent pool, and improve the quality of candidates they can hire.

The opportunity for freedom in regulatory reform post-Brexit has coincided with the government’s renewed focus on creating a more competitive and productive economy. It is looking at ways of reducing the burden on business and removing unnecessary impediments to competition. Little in the way of further detail has however been announced. The expected timeframe for implementation is when parliamentary time allows.

It is not currently known whether existing non-competes lasting longer than 3 months will be void altogether or only enforceable up to the limit; and whether the change will only apply to new clauses once new law comes into force or whether existing clauses will need to be modified. The government has provided reassurance that the reform will not interfere with the continued use of non-solicitation and confidentiality clauses; and notice periods and garden leave provisions will remain untouched.

To continue to protect business interests, some employers may respond to the limitation by extending the notice periods senior executives have to give to end their employment, thus achieving a similar effect in preventing them from joining competitors albeit at the employer’s cost in having to pay for the additional notice period.

Other removal or simplification reforms proposed to employment law focus on regulation which presents a disproportionate administrative burden on business: reforms to recording requirements under the Working Time Regulations, to enabling rolled-up holiday pay, and to removal of consultation requirements for businesses with fewer than 50 employees under TUPE.

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