As part of our summer 2024 employment trends series, we share our observations on developments in relation to restrictive covenants, both in the UK and further afield.
In the UK, we have not seen any new statutory developments on restrictive covenants following the previous government’s response to its consultation on post-termination non-compete clauses. In its response, which it published in May 2023, the government confirmed its intention to limit non-compete clauses in employment contracts to a maximum of three months. There were no proposed similar reforms for non-solicitation clauses.
Labour’s Plan to Make Work Pay did not touch on the issue of competition in the labour market but the government may take a similar approach if it deems it better for employees and that it would open the labour market up to more competition. We are likely to see employers trying to find a work-around in response to any tightening of non-compete restrictions, such as increasing notice periods or introducing covenants in non-employment contracts.
Despite the absence of statutory developments, we have seen a notable shift in strategy when it comes to employers protecting their legitimate business interests. Employers are increasingly sending letters before action requiring former employees (and, sometimes, their new employers) to sign up to undertakings not to breach restrictive covenants before there is any evidence of a breach. Whilst such letters are nothing new, this shows a shift towards a more preventative stance. We find employers want to use these letters pre-emptively to deter former employees from breaching their restrictions and to remind them of their continuing obligations, rather than reactively once the damage has been done.
Meanwhile, our colleagues in the US have had a rather more exciting development in the restrictive covenant arena. In April this year, the Federal Trade Commission (FTC) approved the Final Rule, largely banning new non-compete agreements in employment and nullifying most existing ones, from the end of August 2024. Whilst there is ongoing litigation over the FTC’s authority to issue such a rule, given the short timeline before the Final Rule comes into effect, employers will still need to start preparing for this huge change in the law in the US.
In Europe, the European Commission has published guidance on how national competition authorities in EU member states should approach labour market agreements under competition law. Labour market agreements include agreements between employers not to poach the other’s employees. The Commission has said that such agreements are harmful for employees as they reduce wages and other benefits. There also could be knock-on effects for consumers. The messaging from the Commission and other competition authorities is that labour market agreements should be viewed as cartels, which attract the largest fines. Whilst the UK is no longer a member of the EU, the UK Competition and Markets Authority issued its own research report on Competition and market power in UK labour markets at the start of 2024. Read more in our Competition team’s article here.
