By Suliat Jimoh, Paralegal at Winckworth Sherwood
Following the global pandemic and Brexit, both the UK Government and U.S. Federal Trade Commission (FTC) have proposed changes and key reforms to post-termination restrictive covenants in employment contracts. The intended changes aim to empower employees with liberty and autonomy by allowing them to change jobs more freely without the constraints of lengthy non-compete clauses preventing them from doing so. It is anticipated that these changes will grant greater labour mobility will increase healthy business competition and boost the economy.
What are non-compete clauses?
During the course of their employment, employees – particularly senior ones – would have obtained knowledge of confidential information regarding their employer’s business which could be potentially used to their advantage following the termination of their employment, This is especially the case if their new employment is with a direct competitor.
A non-compete clause is one form of post-termination restrictive covenant which may be used in an employment contract to prevent this. Essentially, stopping an departing employee from going to work for a competitor straightway, typically for a period of between 3 and12 months.
However, the clause must be reasonable and must only be used to protect the employers’ legitimate business interests, anything beyond that is unlikely to be unenforceable. These clauses are generally and usually enforced, in the first instance, by way of interim injunction.
The Government’s announced their proposed measures on 10 May 2023 in their policy paper “Smarter Regulation to Grow the Economy” (see here), with further details published by the Department for Business & Trade on 12 May 2023 (see here).
The proposed changes mean that non-compete clauses will be limited to just 3 months. These changes will apply only to Employment and worker contracts and not apply to wider workplace contracts such as partnership agreements, LLP agreements and shareholder agreements.
The current law will continue to apply for non-compete clauses of less than 3 months whereby a non-compete clause will still be unenforceable unless it is shown to be reasonable.
Employers would still be able to waive the non-compete clauses if they subsequently determine it is not necessary to protect a legitimate business interest by way of use of one.
Apparently some 7 out of 10 non-compete clauses are going to be affected, accordingly to the impact assessment published alongside the response.
It is anticipated that this new legislation will give ”5 million UK workers greater freedom to switch jobs, apply their skills elsewhere and even earn a pay rise.”
There remain numerous unanswered questions, however including whether the time limit will also be applicable to garden leave periods, settlement agreements between employers and departing employees, or whether they will apply retrospectively to current non-complete clauses already in place.
It is uncertain exactly when the proposed changes will come in force, as the Government have stated the legislation will be introduced ‘when parliamentary time allows’.
The US plan to take more drastic measures by banning employers entirely from using non-compete clauses (see here). As it is believed that these clauses destroy healthy competition in the U.S. labour market by obstructing employees from “pursuing better opportunities and preventing employers from hiring the best available talent.”
The proposed changes would make it unlawful for an employer to
(i) enter or attempt to enter into any non-compete agreement with a worker.
(ii) maintain a non-complete agreement with a worker or
(iii) make any representations that a worker is subject to a non-compete agreement.
The FTC estimates that by banning non-compete clauses there could be a $296 billion per year increase of wages and an expansion of career opportunities for nearly 30 million Americans.
Summary Note to Employers
Although we as yet have no clue as to when these provisions will come into force, it would be wise for employers to even now be contemplating new practical ways to protect their businesses, interests and particularly confidential information. Once following these proposed changes which are likely to allow ex-employees to move and work almost immediately with a competitor.
Although we are still waiting for the specific details of both the countries proposed changes, the impression is that it will still be permissible for employers to use other types of restrictive covenants such as non-solicitation of or non-dealing with clients or non-poaching of employees, without the time limitations being applied to non-competes. Further the better utilisation of garden leave provisions, longer notice periods and confidentiality clauses could also be a way to shield their business interests from being damaged.
Further, employers could also consider not relying solely on employment contracts but also workplace contracts, which will not be caught by these 3-month limitations.