Non-competes: 3 month cap proposed in drive for economic growth

 The use of non-competes in employment contracts is not new, and nor is there any suggestion of a recent change in their use necessitating the proposed limit. However Brexit and the Covid-19 pandemic have led the UK Government to target several areas of the economy in its drive to promote economic growth. From reforms to competition and consumer law, new measures to regulate the tech space to a smaller scale evolution in certain employment rules, the Government aims to foster the UK's position as an attractive place for businesses to invest. Now, as part of its policy drive for Smarter Regulation to Grow the Economy, the Government's proposed three-month cap aims to provide employees with more flexibility to join competitors or to start up rival businesses after they have left a position. The cap, the Government hopes, will boost the wider UK economy and increase productivity.

The non-compete cap is one of many recent proposals for increased intervention in UK labour markets. Back in February 2023, the UK Competition and Markets Authority (CMA) published guidance for businesses, warning that various kinds of no-poach, wage fixing and employment-related information sharing agreements can amount to cartel-like behaviour and thus potentially be subject to significant fines under the UK's competition law regime (and also private damages claims). The UK's stance in the competition sphere is consistent with competition authorities around the globe. For example, competition regulators across Europe and the US have shown greater interest in taking action against no-poach arrangements and other restrictive employment practices.

In the sphere of non-competes, however, the international position is perhaps less closely aligned.

At one end of the spectrum, the US Federal Trade Commission (FTC) has proposed an outright ban on employers imposing non-competes on their employees, with its Chair (Lina M. Khan) stating that "the freedom to change jobs is core to economic liberty and to a competitive, thriving economy".  Whilst having explored the option of an outright ban in its December 2020 consultation, the UK Government has decided not to go as far as its US counterparts: landing instead on the three-month cap. It is worth noting, however, that the US position is still at the public consultation stage and there is no guarantee that an absolute ban will be made law (although certain US States, such as California, already prohibit non-competes at a local level).

At the other end of the spectrum, the EU does not provide any centralised framework limiting the use or duration of non-competes in an employment context. Many individual Member States have their own national rules, and in some cases these afford significantly more flexibility than the UK (with a range of around six months to five years being permissible). For example, the limit for non-competes in France and Germany is set at 24 months; in Italy, the maximum is three years for most employees and up to five years for some senior executives.

The three-month cap will apply only to 'contracts of employment' and 'worker contracts' in Great Britain (i.e. England, Scotland and Wales). While statutory definitions of these terms exist in other contexts, as yet the Government has not provided a proposed definition of these terms for the purposes of the limit on non-competes.

The cap will not apply to so-called 'wider workplace contracts', such as partnership agreements, limited liability partnership (LLP) agreements and shareholder agreements, given the imbalance in bargaining power between the parties will in many (though not all) cases be less marked in such arrangements. The Government does not address carry or co-investment arrangements in its consultation but, logically, it would seem that these are excluded from the three-month limit along with LLP and shareholder agreements.

The cap will also not apply to non-solicitation clauses (i.e. those which prevent a former employee from soliciting the clients or employees of their former employer) or non-dealing clauses (i.e. restrictions on a former employee dealing with the customers and clients of their former employer). The rationale is that, whilst these restrictions place limits on former employees, they do not have such a significant impact on their ability to earn a living. Such clauses will remain subject to the usual common law rules on enforceability, i.e. the employer will still need to show the restriction goes no further than necessary to protect a legitimate business interest.

The Government also suggests that the proposal will not affect the ability to keep an employee out of the market using garden leave, or the ability of employers to strengthen their use of other restrictions such as confidentiality and intellectual property protections. Whilst the Government does not explore long-term incentives in any detail in its consultation, these are also outside of the proposed scope of the legislation.

The proposal provides a useful reminder of the intersection between competition law and the employment sphere. We are seeing increasing focus by governments and competition regulators across the globe on the role that competitive labour markets can play in increasing competitiveness and economic growth.

If and when the new law does come into force, it is expected to apply to existing employment/worker contracts as well as to future arrangements. Whilst it would seem premature for businesses with longer non-competes to reduce them now, it would be good practice to start thinking about alternative ways to ensure their employment arrangements are fit for purpose when the new rules come in. In particular, employers may wish to review (i) their existing employment contracts (to ensure provisions on confidentiality, notice, garden leave and other post-termination restrictions are fit for purpose), (ii) their use of incentive arrangements and, where appropriate, (iii) the restrictions that are, or could be, put in place in wider LLP or shareholder agreements.

It is also worth bearing in mind that the Government has not specifically addressed how the cap will affect existing non-competes which are longer than three months – i.e. will they be void or will they be potentially enforceable up to the three-month limit? Whilst we expect the latter, the position should be put beyond doubt at the draft legislation stage. It is also currently unclear how the cap will affect non-competes agreed in settlement agreements. The draft text of the legislation is therefore keenly awaited.

This article is part of a series on regulatory reform and better regulation across a range of different sectors, entitled 'Spotlight on Better Regulation'.  You can also use our 'Regulatory reform' portal to check for the latest updates on changes to regulation across all areas on which we advise.