Non-compete clauses will be limited to three months and employers will not always have to elect employee representatives for small-scale TUPE transfers under plans announced by the government. We look at the proposals and what they mean for employers.
Non-competition clause limited to three months
The government has outlined plans to limit the duration of the non-competition clause to a maximum of three months through legislation.
Non-competition clauses (a form of “restrictive covenant”) are included in employment contracts to limit an individual’s ability to work for a competing company, or to establish a competing company for a period of time after termination. They can play an important role in protecting the employer’s business interests.
There is currently no legislation restricting the use of non-compete clauses, but the courts have intervened to set parameters for their use through case law. Non-competition clauses (and other post-termination restrictions) are only enforceable to the extent that they do not extend beyond what is reasonably necessary to protect the employer’s “legitimate business interests”, such as confidential information and customer relationships. If a court finds the limitation too broad or unnecessary in the circumstances, it will not be enforceable.
The government now plans to introduce a three-month limit on the duration of a non-compete agreement through legislation. Non-compete clauses that do not exceed the three-month limit are still enforceable only if they do not go beyond what is reasonably necessary to protect the employer’s legitimate business interests.
The government estimates that covering the duration of non-competitive in this way will give up to 5 million workers in the UK more freedom to change jobs, apply their skills elsewhere and even earn a pay rise.
The plans are included in the government’s response to the consultation on the non-competition clause. The original consultation document exploring options for reform in this area was published in 2020.
Other options considered were prohibiting the use of non-compete clauses or requiring employers to compensate employees during the period of the non-compete clause. However, the government has decided not to pursue either option.
What does this mean for employers?
Employers will still be able to use non-disclosure clauses, notice periods or gardening leave to protect their company from former employees competing with them.
They will also still be able to use other types of longer-term restrictions after termination, such as non-solicitation clauses that limit a former employee’s ability to coax customers, staff, or suppliers. However, many employers rely on non-compete clauses because other less restrictive measures are difficult to monitor in practice, so these proposals may not be popular with them.
The proposals only apply to employment contracts and employment contracts. They do not apply to non-compete clauses in partnership/LLP agreements, purchase and sale agreements and shareholder agreements.
What is not clear is whether the proposals will apply to non-compete clauses in settlement agreements or other types of documents, such as those about bonuses and LTIPs. Hopefully the bill will clarify this.
It is also unclear how existing non-compete agreements that last longer than three months will be affected by the new legislation. Will they be void or will they still be enforceable but only for up to three months?
The new legislation will be introduced ‘when parliamentary time permits’. It will probably be some time before it takes effect. In the meantime, employers may want to review their current protections after termination and consider how best to protect their business interests if the proposals go ahead. They will also, if necessary, have to update their employment contracts in due course.
We may see a trend towards longer notice periods and the use of gardening leave for longer periods if the proposals go through.
The three month limit applies to Great Britain (England, Wales and Scotland) as employment law has been transferred to Northern Ireland.
TUPE
Transfers of undertakings (protection of employment) (TUPE) Regulations protect workers’ employment rights when the company or business they work for transfers to a new employer. TUPE may also apply when a company changes ownership or a service transfers to a new service provider.
Currently, micro-enterprises with less than 10 employees can directly inform and consult affected workers in the absence of existing worker representatives.
However, larger companies are required to organize elections for affected employees to elect new employee representatives if they don’t already exist, which can add to the complexity of the TUPE transfer process.
The government is proposing to remove the requirement to elect worker representatives for TUPE consultations for:
Companies with fewer than 50 employees, and
Companies of all sizes involved in a transfer of fewer than 10 employees.
Direct consultation with employees would only be allowed in the absence of existing employee representatives. If there were employee representatives at all, the employer would still need to consult with them.
What does this mean for employers?
Removing this requirement for companies with less than 50 people and transfers of less than 10 employees and allowing companies to consult directly with affected employees simplifies the TUPE process regarding small-scale TUPE transfers and is a welcome proposal .
This proposal is a relatively minor change to TUPE and many employers will not be affected by it. There are many other aspects of TUPE that could potentially be reformed, but it looks like TUPE will remain largely the same for now.
