Non-compete clauses within employee contracts typically aim to prevent employees from setting up or joining a competing business for a period after their departure. In May 2023, the Government set out plans to limit the length of these clauses to 3 months.

What is the current law on non-compete clauses?

Non-compete restrictions are often used alongside other post-termination restrictions (also called restrictive covenants), such as non-solicitation of customers or key staff, non-dealing with customers or key staff, non-interference with suppliers, and confidentiality obligations.

The protection that such provisions afford will depend on the extent to which the relevant restrictions are judged by the court to be enforceable.

To be enforceable, a post-termination restriction must be incorporated into a contract between the employer and employee. This contract may be the contract of employment or service agreement, or a separate collateral contract. It may be at the start, during the employment relationship, or on termination as part of an exit agreement.

As with other restrictions, a non-compete clause will be unlawful unless an employer can show that it is reasonably necessary to protect its legitimate business interests and is reasonable in the public interest and between the parties when the restriction was agreed. Any non-compliant clauses will be unenforceable as they are against public policy and a restraint of trade.

In practice, it is common for a non-compete restriction to be for a period of six to 12 months. It may focus on a particular geographic area, a particular type of business activity, or it may be more of a blanket restraint to prevent the employee from engaging in any business which competes with the employer. Ultimately, any restriction is judged on its specific facts in the circumstances, including the nature and suitability of the restraint, the geographical ambit, the duration, and whether a lesser form of restriction would provide sufficient protection for the employer.

What has been proposed?

In its response to a consultation paper on measures to reform non-compete clauses, the Government has acknowledged the protection these clauses afford employers, whilst also recognising the adverse effect on the employee’s future mobility and the wider economy due to the impacts on competition and innovation.  

The proposed reforms would limit all non-compete clauses in worker and employee contracts to a maximum of three months. The Government hopes that this will boost the wider UK economy by allowing employees more flexibility to change jobs and increase business’ productivity by expanding the talent available to employers.

What would this mean for employees and employers?

Whilst on the face of it this seems to be a positive for employees, it still leaves room for employers to include alternative post-termination restriction clauses, some of which have the same level of restriction in practice for the employee, such as non-dealing restrictions. Employers could also mitigate the impact of the proposed limit by utilising longer notice periods in new or revised contracts and using them in conjunction with garden leave clauses. An employer can still rely on confidentiality restrictions, although these are notoriously difficult to enforce.

Furthermore, employers may also still be able to agree additional and longer non-compete restrictions in exchange for supplementary payments within settlement agreements or incentive scheme.

Next steps

The Government hopes to implement this change “when Parliamentary time allows.” Therefore, it is likely to be some time before the proposed limit comes into force in primary legislation. For now, employers can continue to include non-compete clauses in employment contracts, but it would be wise for employers to consider the proposed limits and look at mitigating the impact by using other restrictions to protect the business.

If you are an employer and you would like to speak to us regarding what you can be doing now to pre-empt this possible change in law, or if you are an employee and you would like to understand how this can affect you or require assistance with negotiating an employment contract or a settlement agreement, please do not hesitate to contact the employment law team at Lennons Solicitors on 01494 773377 or email us at hello@lennonssolicitors.co.uk.

DISCLAIMER: The content of this article has been prepared for informational purposes only. This content does not constitute legal advice, nor does it give rise to a solicitor/client relationship. Specialist legal advice should be taken in relation to specific circumstances.