Changes to non-competes: What should employers do?

The Government has announced plans to limit the length of non-compete clauses in employment contracts in Great Britain to three months. This would represent a significant change to the current position. While non-competes must be no longer than necessary to protect the employer's interests, case law suggests the upper limit for senior executives is currently six to twelve months for non-competes. However, we do not know yet when (or if) this limit will come into force. It requires new legislation which the government plans to table "when parliamentary time allows" and it remains to be seen whether this can be done before the next general election. Despite the uncertainty, we set out below the key implications should the limit be introduced and what employers can be doing now to be prepared.

Some detail exists about how the new limit would operate in practice, but many questions remain. So far, the following is clear:

The three-month limit will apply to non-compete clauses only but not to other post-termination restrictions such as non-solicitation, non-poaching or non-dealing provisions.
The limit will not affect the ability of employers to keep employees out of the market through the use of garden leave.
The limit will apply to non-competes in employment and worker contracts but not in other arrangements such as partnership agreements, LLP agreements and shareholder agreements.
Once the limit is in force, the usual rules on enforceability will still apply to any non-compete of three months or less, i.e. employers will still need to show the restriction goes no further than necessary to protect a legitimate business interest.

In contrast, it is not yet clear how the limit will affect existing non-compete clauses which are longer than three months – will they be completely void or will they be potentially enforceable up to the three-month limit? It is also not clear how the new law would affect non-competes agreed in settlement agreements. It is expected that this detail will be set out in draft legislation.

Despite the uncertainties, there are some steps employers can take now to shore up their position:

Employers should review their existing employment contracts to ensure provisions on confidentiality, notice, garden leave and other post-termination restrictions are fit for purpose. This may mean considering increasing notice periods for senior or key employees and making sure that they have the right non-solicitation, non-poaching and non-dealing restrictions.
Employers may also wish to review their incentive arrangements, to consider how these can be used to prevent employee competition, e.g. by including non-compete clauses (and other restrictive covenants) as well as mechanisms for incentives to be lost or clawed back if the employee competes.
Where appropriate, employers may also consider what other restrictions are in place, or could be put in place, in wider arrangements such as LLP agreements or shareholder agreements.

Given the uncertainty around timing, it would seem premature for businesses which currently have longer restrictions to reduce their non-competes to three months at this stage (although it is always good practice to keep restrictions under review and the proposed limit may be a factor some employers will wish to weigh in the mix).

Should you wish to discuss your business protection arrangements, please get in touch.

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