Proposal for three month cap on non-compete clauses

Last month, the government announced plans to introduce new legislation to limit the duration of non-compete clauses, a type of restrictive covenant, as part of its drive for economic growth.

A non-compete (or non-competition) clause is aimed at preventing an individual’s ability to work for, or establish, a competing business for a certain period of time after the termination of their employment.

The three-month cap will only apply to employment contracts or worker contracts. It will not apply to other contractual arrangements such as partnership agreements, franchise agreements or share purchase agreements. This is because it is assumed that the imbalance in bargaining power between the parties will not be as significant.

Currently, no specific legislative framework governs the enforceability of non-compete clauses in an employment context. Under common law, non-compete clauses are only enforceable if they are “no more restrictive than reasonably necessary to protect the employer’s legitimate business interests”. Typically, the upper limit for senior executives is six to twelve months.

This does not mean that all non-compete clauses restricted to three months will be automatically enforceable. The common law principles will still apply, meaning that restrictive covenants that are a restraint on trade will be unenforceable unless it can be shown that they are reasonable. The government did not address how the proposed change would affect existing non-compete clauses that are longer than three months.

The cap will not apply to non-solicitation and non-dealing clauses. The government is of the view that non-competes are one of the strongest restraints on trade, and while the other restrictive covenants do limit the behaviours of former employees, they do not impact their ability to earn a living to such an extent that they cause financial disadvantage.

Of course, the proposal will not prevent employers from using notice periods, garden leave or strengthening confidentiality and intellectual property clauses in order to protect their business interests.

There is currently no timeframe for when the legislation is expected to come into force except for “when Parliamentary time allows”. Therefore, while we do not expect legislation to be passed any time soon, it does serve as a good reminder to employers to review their contracts of employment. It is important to note that a “one size fits all” approach to restrictive covenants may lead to a challenge over enforceability and so it is worth tailoring them to individual job roles.

Contact our employment law solicitors today

If you have any questions regarding any of the issues raised in this article, please do not hesitate to contact our specialist Employment Law team by using our online enquiry form or by calling 0330 191 5713.