Clipping the wings of non-competes
Last week the Government announced its latest in legislative proposals to grow the economy post-Brexit, curiously referred to in their paper as “Smarter regulation”. The use of the epithet “Smart” always leaves me rather troubled – think Smart motorways and Smart meters and you begin to catch my drift. One of the more eye-catching proposals is to legislate to apply a temporal limit of 3 months on non-compete clauses in employment contracts. On the face of it, this is a radical change as it unpicks at the fabric of common law on restraint of trade that dates back centuries to the days of master and servant.
There is little detail on the proposed legislation, but we do know that the intention is not to prohibit the use of non-solicitation restraints, paid notice periods or garden leave and that protections around confidentiality are intended to be unaffected. So why pick on non-competes? The disparate treatment of non-competes compared to its less intrusive cousins is not entirely out of the blue. In 2020, the Government put out to consultation proposals to ban such restraints or make them enforceable only by compensation being paid to the restrained employee. Also foreshadowed was a statutory limit on the length of these restraints.
The rationale for this time embargo is interesting. On the one hand, the Government hopes that up to 5 million workers will benefit by being given greater choice and freedom to switch jobs. On the other, for employers, it is asserted that the change will allow them to grow and increase their productivity by widening the available candidate talent pool.
I am sceptical that these objectives will be achieved if this reform comes to pass. In the genus of post-termination covenants, the non-compete has always been at the very top of the restraint hierarchy. Judges have always been most hostile towards a clause that seeks to prevent a former employee earning their daily crust, rather than, say, stop the tapping up of former clients or colleagues. It is axiomatic that any non-compete that is unreasonably wide in length or scope is bound to fail. Partly by reason of this, many employers have taken an unambitious approach when imposing these covenants on their senior staff. In the financial and professional service sectors, it is not uncommon for non-competes to be short in length (relative to other covenants) or sometimes altogether absent from employment contracts. I therefore query if this change is going to make any real difference. I suspect that many employers that elected to use longer non-competes will adapt their contracts to extend notice periods and make greater use of garden leave, as these provisions have always attracted much less judicial challenge (but still need to be reasonable). This will, of course, cost employers more as they will be paying salary and benefits for longer. Similarly, employees that are eager to move on to a new shop will find that they are more firmly shackled if they are placed in the garden and kept employed and out of the market for longer. In any case, the workarounds for this change will be plentiful and not beyond the wit of any decent employment lawyer.
To be fair to the Government, the reform does seem well-intentioned and in step with proposed changes elsewhere. For example, in the US, the Federal Trade Commission is proposing to ban non-competes altogether (these can be up to 2 years in the US) based on similar ideological grounds to this Smarter regulation. Many commentators have also asked the question whether the reform will actually see the light of day. It is stated to come in “when Parliamentary time allows”. Many of the provisions of the Employment Bill in 2019 were similarly conditioned and have not been pursued with any great vigour by the Government since. What these four words mean is that there is no actual timetable and a (likely) Starmer Government may have different ideas – we shall see.
