For many employees, especially those in higher-paid positions, leaving a job has long been a minefield.
Non-compete restrictions, used by employers to retain talent and protect their business interests, limit an employee’s ability to join or start a rival business in the same field for a set period after their departure. But the practice has come under increased scrutiny in recent years and has even been criticised for impeding competition, innovation and higher pay.
That’s why the Department for Business and Trade (DBT) is proposing that non-compete clauses in employment contracts should be capped at three months. The idea is in response to a 2020 consultation on the matter and follows hot on the heels of similar moves in the US.
Indeed, the authorities across the pond are preparing to go much further. Earlier this year, for instance, the Federal Trade Commission proposed a rule banning non-compete clauses in new employment contracts, as well as rescinding existing ones.
The DBT’s proposed three-month limit may not be quite as radical but, even so, it would still mark a significant shift from the typical non-compete period of six months or more in the UK. It would also replace a common law standard with a statutory one.
“It’s a contentious issue, from an employer and employee perspective,” says Kate Palmer, HR advice and consultancy director at Manchester-based employment law consultancy Peninsula. “Employees in this job market want to have the freedom and ability to seek new employment. Employers probably have a different view of that.”
What does reform of non-competes mean for employers?
For its part, the government has argued that the introduction of a three-month limit on non-compete clauses would benefit employers by making it faster and easier to recruit talent from rival firms. It could also help level the playing field for companies that don’t use non-competes.
Still, the proposed change – which would affect an estimated 5 million employees in the UK – looms as a worrying prospect for businesses. If the rationale behind non-competes is to extend control over things like trade secrets, client lists and intellectual property, the new limit would lessen that control. And a statutory rule would place far more restrictions on how non-compete clauses could be used in employment contracts.
“I’m not sure employers will be particularly pleased about this because it does mean that when they invest in technology, and research and development, they need to be careful about whether some of that is walking out of the door,” says David Cabrelli, professor of labour law at Edinburgh Law School.
The proposal on non-competes was unveiled in May as part of a post-Brexit package of reforms to promote economic growth and boost the competitiveness of UK firms operating internationally. The announcement followed a consultation in 2020 and 2021, which drew 104 formal responses, from a mix of individuals, legal professionals, employers and trade associations. Of that total, 60% supported an upper limit on non-compete periods, while 53% opposed an outright ban, according to the DBT.
Among employers, 63% said they use non-compete clauses, and 12% had done so in the past. They’re most commonly used in higher-paid occupational groups, but also extensively in middle- and lower-income jobs, according to the government. And while most typically last around six months, non-competes can last as long as 24 months.
For Cabrelli, the three-month limit is a “halfway house” of sorts between imposing a total ban on non-competes and letting the status quo stand. If enacted, though, legal and HR experts expect employers to go all out to offset the three-month cap.
What alternatives are there to non-compete clauses?
Those efforts might include, for instance, relying on longer notice and garden leave provisions as alternative ways to limit the activities of departing employees. Such steps, though, will be more costly for employers, since they would have to continue paying employees during notice and garden leave periods.
“They will essentially be paying for the protection they might have otherwise got from a non-compete clause, where commonly no continuing payment is made,” notes one analysis of the government’s proposal on non-competes from employment law specialists Robin Jeffcott and Joanna Powis, at law firm Reed Smith.
Employers are also likely to look to other types of restrictive covenants to make up for shorter non-compete periods. That might mean tightening up confidentiality agreements and other restrictions that keep departing employees from soliciting or having dealings with past clients, or poaching colleagues.
Beyond the paperwork, Palmer says there’s a key role for HR staff in helping to explain such agreements to employees and recruits, and any changes to them. That’s especially important when an employee is leaving a company and may soon find themselves in breach of a non-compete clause.
“It’s often the HR professional who has that discussion. ‘Do you know what this means in practice? If you do this, these are the ramifications,’” explains Palmer.
In that vein, the government said in May that it would produce guidance for both employers and employees to enhance awareness of non-compete clauses in contracts.
How might non-compete reform play out?
Still, big questions remain about the scope and timing of any change to non-competes. For one thing, it isn’t yet clear whether the new rules would apply retroactively to existing employment contracts. If so, “Standard contracts for recruits will probably need adapting, and existing ones will need to be renegotiated, which will likely be a time-consuming and difficult project,” says Powis.
Regarding legislation, the government said in its May announcement only that it would introduce a statutory limit on non-competes “when parliamentary time allows”, but it remains tight-lipped about its plans. As of late August, a spokesperson for the DBT explained that no legislative timetable has been set as it continues “to review the policy and next steps”.
If it is to be passed before the next general election, a bill on non-competes would have to be introduced this autumn, Cabrelli suggests, because of other pending legislation that’s still moving through parliament. The measure would need to go forward as primary rather than secondary legislation too, resulting in a longer process.
That’s little comfort to HR and other professionals looking for more detail on the government’s plans for reforming non-competes. “If businesses like ours, or our clients, knew the specifics of it, they could start acting in line with it to prevent a whole retrospective exercise or some kind of big upheaval that may ensue,” says Palmer.