What does the planned change to non-compete post-termination restrictions mean for employers and employees?

The government has announced plans to limit non-compete clauses to a maximum of 3 months. 

This does not mean that non-compete clauses of up to 3 months automatically become enforceable (as the existing law on enforceability would continue to apply too), but 3 months would be the maximum that might be enforceable. 

Read on to hear more about the intended change and steps that employers should consider.

Current position of post-termination restrictions / restrictive covenants

Employers have the option to include post-termination restrictions (also called restrictive covenants) in employment contracts and other documents.  Post-termination restrictions limit what an individual can do for some time after their employment contract ends, usually for between 3 and 12 months. 

The restrictions vary depending on what the contract says, but can include things such as preventing an individual from dealing with clients, soliciting clients or from competing with the employer.  Post-termination restrictions usually combine several of these restrictions.

There are already limits on post-termination restrictions.  They are only enforceable if an employer can show a court that the restriction goes no further than is reasonably necessary to protect a legitimate business interest of the employer.

Planned change: non-compete clauses to be limited to 3 months

The government’s intended change specifically refers to non-compete clauses (clauses which stop someone from competing with their former employer for a period).  It plans to limit non-compete clauses to a maximum of 3 months after termination of employment.

Non-compete clauses can be particularly difficult for people because in some cases they effectively stop someone from working in their field at all.

The government has not said when the change will take place, only that it will be when “parliamentary time allows”.  This could be anything from a few months to many years as it depends whether the government prioritises it.  Given that a general election is due in about 18 months, the government would presumably want the legislation to be in place before then.

What impact will limiting non-compete clauses to 3 months have on employers and employees?

Most employers are likely to be able to sufficiently protect their interests by using other types of restrictive covenant, such as non-solicitation of clients, perhaps (in appropriate cases) in addition to a non-compete clause of up to 3 months.

However, some employers may conclude that this is insufficient for them.  If so, employers could start seeking longer notice periods in their employment contracts, with the option to place employees on garden leave during the notice period.  This provides a mechanism to stop an employee from competing (because they remain employed by the original employer) for a period which could be longer than 3 months.

What should employers do now?

Employers should consider the following steps:

• Review how the business currently uses post-termination restrictions.  For example:
  • Are existing restrictions likely to be enforceable – do they go no further than reasonably necessary to protect a legitimate business interest?
  • Are existing restrictions revisited as people change roles within the business, such as on promotion?

• Check whether the business currently uses non-compete clauses of more than 3 months.

• If so, consider whether a 3-month limit on non-compete clauses will mean the business wishes to make changes to other aspects of its post-termination restrictionsand/or notice periods. 

Uncertainty about some aspects of the planned change

Significant aspects of the planned change are currently unclear, including:

• If a non-compete clause is longer than 3 months, will it be completely unenforceable or will it be read as if it is limited to 3 months?

• Does the change apply to existing employment contracts?  If so, will there be a transition period and what obligations would employers have to notify existing employees of the change?

• Does the change apply to other documents such as settlement agreements, share plans or shareholders agreements?

• Currently, post termination restrictions often state that they are reduced by any time that an employee spends on garden leave.  Could employers change this approach for non-compete clauses (to try to achieve a 3 month non-compete after a period of garden leave) and, if so, how likely is it that courts would uphold this?

• Could clauses preventing someone from dealing with clients also be affected in some situations?

Please get in touch if you would like to discuss these points.

Chris Bushnell regularly advises employers and employees on post-termination restrictions, as well as other areas of employment law.  If you would like help reviewing post-termination restrictions or with other employment law issues, please get in touch with Chris.