Non-compete post-termination restrictions – Government response to consultation

The Government has published its response to consultation on proposed measures to reform post-termination non-compete clauses in contracts of employment.

There are no statutory provisions regulating the use of restrictive covenants in contracts of employment. Non-compete clauses aim to prevent an employee from working for a competing business for a set period of time after their employment has ended. Typically, other restrictions may seek to prevent an employee from soliciting or dealing with customers; or poaching key members of staff. Case law has established that to be enforceable, non-compete clauses must be no wider than reasonably necessary to protect an employer’s legitimate business interests.

Non-compete clauses – consultation

In 2020, the Government published consultation seeking views on measures to reform post termination non-compete clauses in employment contracts. The consultation included proposals for:

Mandatory consideration – making post-termination non-compete clauses in contracts of employment enforceable only when the employer provides compensation for the period of the restriction; or
Banning non complete clauses – as an alternative to mandatory consideration.

On 10 May, the Government published its policy paper ‘Smarter regulation to grow the economy’, setting out its commitment to legislate to limit the length of non-compete clauses to 3 months.

Non-compete clauses – response to consultation

The Government has now confirmed that it will not legislate to make post-termination, non-compete clauses in contracts enforceable only when the employer provides compensation for the period of the restriction. It considered that mandatory compensation would apply a substantial direct cost to businesses that use non-compete clauses at a ‘critical juncture in our economic recovery’.

The Government also considered the risk that mandatory compensation could lead to employers using longer periods of garden leave as an alternative to non-compete clauses, which would lead to individuals being even more restricted than they would be if they were subject to a non-compete clause. It also took into account the risk that small businesses may not be in a financial position to provide compensation for the period of the restriction. In addition, courts may be more willing to enforce non-compete clauses where an employee was being paid for them, which would not support the objective of boosting competition and innovation.

However, the Government has confirmed that it will intervene in relation to some extent in the use of non-compete clauses. It will:

enhance transparency by producing guidance on non-compete clauses; and
introduce a statutory limit on the length of non-compete clauses of three months. This is described as ‘bold action to boost flexibility and dynamism in the labour market, and to unleash greater competition and innovation’. The limit will make it easier for workers to move to a competitor or start a competing business. It will also make it easier for businesses to fill vacancies and attract better candidates. This will not affect other restrictive covenants, such as non-solicitation, non-dealing or non-poaching clauses.

The Government has also confirmed that it will not proceed with the option of a ban on the use of non-compete clauses in contracts of employment. It considered that there does not appear to be sufficient evidence that the potential benefits of a ban would outweigh the risks and the potential for unintended consequences; and that there is not a strong enough case to justify such a strong Government intervention.

Comment

The Government estimates that non-compete clauses are widely used, with around 5 million employees subject to a clause with a typical duration of around 6 months. It considers that this can adversely impact both the individual, whose future mobility is restricted, and the wider economy due to the impacts on competition and innovation.

There is no mention, however, of what the effect of introducing a three-month limit on non-compete clauses will be on existing contracts of employment that already include longer periods of restriction. Legislation to introduce the three-month limit will be brought forward ‘when parliamentary time allows’.

26 May 2023

If you would like to receive monthly employment law updates and news of our events, sign up for our email alerts.

LAST POST