Hot on the heels of the Federal Trade Commission (“FTC”) proposal for a complete ban on non-competes, the UK Government has announced its intention to limit the length of non-compete clauses to three months.
Impact of the reforms in the UK
Importantly, the three-month limit will apply only to non-compete clauses. Thus, it will not affect or limit the use of non-solicitation clauses (which prevent former employees from contacting customers or clients in an attempt to win their business) or non-dealing clauses (which prevent former employees from dealing with customers, even when a customer has approached the employee). The limit also will apply only in contracts of employment and what are classed as “worker” contracts. Common law principles on restrictions being drafted no wider than reasonably necessary to protect legitimate business interests will continue to apply.
The limit will not interfere with an employer’s ability to rely on paid notice periods, garden leave, as well as confidentiality obligations. The Government has ruled out introducing mandatory compensation for the period of non-compete clauses — a concept that is more commonplace in mainland Europe such as Germany, Italy and France. When it comes to enforcing a three month non-compete, the proposal also will likely increase the time pressure on an employer seeking injunctive relief and the interim stage will likely become determinative of the issue given the difficulties of getting a full trial within three months.
USA influencing a global trend
Whilst the UK’s proposal stops short of a total ban, the FTC’s similar, albeit more extensive, proposal in the United States shares very similar reasoning to that put forward by the UK Government and signals a move in the same direction. The FTC argues the freedom to change jobs is key to a competitive, thriving economy and that non-competes suppress wages and hinder innovation. It even suggests that eliminating non-competes would generate jobs for as many as one in five workers currently subject to non-competes, raising wages by $250-$296 billion dollars.
The UK’s subsequent proposal (in addition to the FTC’s) also is likely to encourage debate in other jurisdictions, including the European Union. The European Commissioner for Competition has indicated that the EU is not just looking to investigate traditional cartels but also anti-competitive conduct in labour markets such as wage-fixing or “no-poach” agreements.
The UK Government has stated that it intends to limit non-competes “when parliamentary time allows”. Since this has been a debate that has run for a number of years within Government (coupled with the prospect of a general election in 2024), it could be some time before we see any definite change on this issue.
For now, and until the Government brings forward legislation, non-competes of over three months remain enforceable in the UK, provided they are no wider than reasonably necessary. Employers can therefore continue to include longer non-competes in their employment contracts as a means for protecting their business interests, although we anticipate greater pushback from employees asked to sign on to long non-competes.
There are questions left unanswered and in particular around what will happen to existing non-competes that are longer than three months, or to non-competes that come into force between now and when any legislation is enacted. Will they automatically be treated as unenforceable, or amended to apply for three months only, or will there be a grandfathering provision such that existing provisions continue to apply for a specified period?
We will need to wait to see what the legislation looks like (and any guidance the Government publishes on non-compete clauses). In the meantime, employers can start to prepare by having employment contracts reviewed to ensure that other restrictive covenants (e.g., non-solicitation/non-dealing, confidentiality obligations) are well-drafted and provide the best possible protection, as well as considering other alternatives like longer notice periods, more active use of garden leave, and tighter enforcement around confidentiality undertakings.