The end of the non-compete clause?

Non-compete clauses, otherwise known as post-termination restrictions, are a common part of the majority of UK employment contracts, particularly in the corporate sector. They are aimed at providing businesses with certainty that an employee will not, upon leaving, be able to use key insider information gained while working within the business to disadvantage it elsewhere. In essence, non-compete clauses, which are almost unique in the fact that – alongside confidentiality obligations – they survive termination of employment, mean that an employee cannot work for a competitor of their previous employer for a specified period of time. This period is often around 6 months, but contracts can vary depending on the employee’s seniority, with some senior executives and directors being locked out of competitive jobs for a whole year or more.

There is a raft of significant and complex regulation regarding post-termination restrictions, and case law has developed alongside this to ensure they must be very specifically and fairly drafted in order to be enforceable against an employee. For example, such restrictions are only permitted to allow an employer to protect trade connections or trade secrets and confidential information. Similarly, a restriction will be unenforceable if it is any wider than is necessary to protect the above pre-identified interest. This means that ‘blanket’ non-competes that do not specifically consider the role an individual has held are likely to be considered too wide. Despite these arguable caveats, most employees subject to post-termination restrictions will generally not attempt to join a competitor for the relevant time period for fear of retribution or injunctive proceedings being taken by an employer.

The government has previously identified that this period of effective delay, whereby workers are prevented from doing a job in a particular field is a significant drain on the economy. Post-termination restrictions are also potentially a contributor to the economically inactive portion of the UK labour market, defined as those who are inactive for a reason other than long term sickness. This number is a significant worry for the government as it stagnates growth when those who could be working are not. The number today is significantly higher than pre-pandemic levels, meaning there remain considerable swathes of the UK population who have not returned to work. People sitting at home waiting out post-termination restrictions in highly competitive industries add to this number.

Changes were announced earlier this year, and the government has stated it will promote ‘competition and productivity in the workplace’ by limiting the length of non-compete clauses to three months only. This reduction will, they believe, provide ‘more flexibility for up to 5 million UK workers to join a competitor or start up a rival business after they have left a position’. The reference to start-ups by the government is interesting and is linked to wider government and bi-partisan parliamentary goals to make Britain a more global player in emerging and growing markets such as technology. This is something that is achieved effectively through a strong-start up and small business culture, which the UK has struggled to build when compared with other countries like the US.

Despite changes being announced, it looks increasingly unlikely that this will happen in the near future. No strong commitment was made to the reform, and the recent King’s Speech made no mention of it. With the next general election drawing closer, there is likely to be little time for any new law to be brought into force before then, and a change in government would only further deprioritise post-termination restriction reform.

If the change did come into effect, what could it mean for non-compete clauses more widely? Will moving to three-month restrictions as a maximum only mean companies will become more cautious about what information they share with employees? Will this have a knock-on effect on intellectual property law’s interaction with employment law instead, as employers become more likely to rely on intellectual property restrictions in their contracts to ensure that, if an individual does decide to move to another company, they keep their previous employer’s information confidential?

Regardless of what happens in this area, we will keep you up to date on how it progresses. We are able to advise both employers and employees on the drafting and effect of post-termination restrictions in employment contracts. Please reach out to Hina Belitz and her team on the details below if you would like to discuss this further.