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Government intends to impose limits on post termination restrictions

View profile for George Miller
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The Government has published a policy paper setting out various changes it intends to make to the law following Brexit. One of these changes has caught the eye of employment lawyers – they intend to limit the duration of any non-compete clauses in employment contracts to just three months.

What are non-compete clauses?

Some employment contracts, particularly those for senior individuals, contain clauses that limit what the employee can do once their employment has ended. These are known as post-termination restrictions or restrictive covenants.

A non-compete clause is a specific type of post-termination restriction that prevents the employee from joining a competing business for a specific period after their employment has ended. Sometimes these clauses set out a specific list of companies the employee is prohibited from joining, others may simply give a description of the type of businesses the employee cannot join.

Usually, these restrictions last for at least six months, although for more senior individuals they can be for longer periods of 12 or 18 months.

What are the current limits on non-compete clauses?

Courts will only enforce post-termination restrictions, including non-compete clauses, if they go no further than necessary to protect the employer’s legitimate business interests. For that reason, in order to be enforced the clauses should be carefully drafted to ensure the employee is not prevented from doing anything that is not a competitive threat to their employer. An example might be a non-compete clause that prevents an employee from having “any interest” in a competing business. This would prevent the employee from even having a small number of shares in a publicly traded company, so it would not be enforceable.

To stand the best chance of being enforced, post-termination restrictions should ideally be tailored to the employer and, where appropriate, to the individual employees as well. Restrictions that are too long in light of the seniority of the individual and the competitive threat they may pose will also be unenforceable.

How can businesses protect themselves once the 3-month limit comes into force?

The Government’s paper says that the limit on non-compete clauses will not affect employers’ abilities to protect their interests using garden leave periods, confidentiality obligations or other post-termination restrictions such as non-solicitation clauses. These clauses typically prevent employees from trying to obtain business from their previous employer’s clients, and again these generally last for periods of between 6 to 18 months.

As with non-complete clauses, non-solicitation clauses also need to be carefully drafted to ensure they go no further than necessary to protect the business. Drafting errors can leave them unenforceable.

Once the 3-month limit on non-compete clauses comes into force, non-solicitation clauses will no doubt become much more important for businesses looking to protect their goodwill when their employees leave. We recommend that businesses review their existing restrictions now to ensure they are adequately protected in the future.

What about non-compete clauses in shareholder agreements or settlement agreements?

The Government has not published any draft legislation alongside its policy paper, so we do not know exactly how the 3-month limit will work. However, the paper only refers to non-compete clauses in “employment contracts”, which leaves open the possibility that longer non-compete clauses in other types of agreement may still be enforceable. The devil will be in the detail of the legislation that has yet to be published.

When will the 3-month limit come into force?

We don’t know – the Government simply says they will bring in the legislation “when parliamentary time allows”. However, it is never too early for businesses to review their existing contracts and post-termination restrictions.

Why is the Government doing this?

The explanation given in the paper is that it will give employees greater freedom to switch jobs and apply their skills elsewhere. The UK is not the only country considering such a change – the US Government is consulting on banning non-compete clauses altogether.

The Government also says that the change will support employers by widening the talent pool from which they can hire candidates. That may be true; however, for many employers this change may be seen as a double-edged sword which both makes it easier for them to hire, but also increases the likelihood of key employees leaving.

Our specialist team of employment lawyers are always happy to help. For any queries relating to post-termination restrictions or employment contracts, please give us a call.