Non-compete clauses are under scrutiny. In several jurisdictions, governments are reconsidering whether employers should be able to enforce non-compete provisions. In May, the UK government proposed to limit non-compete clauses in employment contracts to three months. This followed more extreme proposals in the US where, in January 2023, the US Federal Trade Commission (FTC) proposed to ban non-competes (and equivalent restrictions) across the US for most employees and contractors, despite current rules differing hugely from state to state. In Europe, rules differ from country to country, but nowhere yet bans non-compete clauses completely. The Netherlands looks set to be the latest country to implement changes, recently proposing to limit the duration of non-compete clauses and planning to consult on this later in the year.
What are non-compete clauses?
The purpose of a non-compete clause is to protect an employer’s interests when an employee leaves. They restrict a former employee’s ability to work for a competing employer, or to set up their own competing business, and take advantage of the former employer’s confidential information, connections and goodwill for a specified length of time. In the UK, the starting point is that clauses that restrict what an employee can do after termination are void as a restraint of trade and contrary to public policy. These clauses will only be enforceable where the employer can show that it has legitimate interests to protect and that the restriction goes no further than is reasonable with regard to the parties’ interests and the public interest. At present, non-compete clauses in employment contracts commonly restrict an individual’s activities for between six and 12 months after their employment terminates. The longer the restriction, the greater the risk a court will find it goes too far.
What changes does the government propose in the UK?
In its recent policy paper, the Department for Business & Trade stated that “unnecessarily burdensome clauses have become a default part of too many employment contracts”. In the government’s view, “this can inhibit workers from looking for better paying roles, and limit the ability of businesses to compete and innovate.” As a result, the government announced its intention to limit the length of non-compete clauses in employment contracts to a maximum of three months, when Parliamentary time allows.
The proposed reform only applies to non-compete clauses in employment contracts. It will not affect employers’ ability to place a departing employee on garden leave during their notice period. Nor will it affect the validity of other similar clauses, such as non-solicitation clauses that prevent a departing employee poaching colleagues, clients or other contacts from their former employer. These types of restrictions are vulnerable to a court striking them down, in the same way as a non-compete clause, if the employer does not have a legitimate interest to protect or the clause goes too far in its attempt to protect those interests. We expect that employers will rely more heavily on non-solicitation clauses if the proposed reform comes into effect. It will become even more important to ensure these clauses are drafted carefully and precisely.
The government does not propose to extend the planned limitation on non-compete clauses outside employment contracts. Parties will still be able to negotiate non-compete provisions in partnership, business sale or shareholder agreements of a longer duration.
In several European countries, including France, Germany and Spain, employers may only enforce non-compete provisions if they pay the employee a partial (or even full) salary for as long as the restriction lasts. The government consulted on introducing a similar requirement in the UK, but concluded that the direct cost for employers was too great.
The government hopes the new limit will have a positive impact on the UK economy, allowing employers to hire experienced individuals more easily.
The proposed reform is still in its very early stages and little further detail is available at present. We do not yet know, for example, if the reform will only apply to new contracts going forward or retrospectively to all contracts. It is important for employers to keep this on their radar and listen out for developments. If an employment contract review is on the horizon, restrictive covenants should be top of the list to reconsider.
