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Non-compete clauses in employment contracts. The future? Well eventually!

In 2021 the Government embarked on a consultation process on whether to introduce legislation on the use of non-compete clauses found in employment contracts. The underlying purpose is to drive competition and encourage entrepreneurship, in order to stimulate the economy. Amongst the options it was considering included a total ban on the use of non-compete clauses, i.e. making them unenforceable or requiring the employer to compensate the employee for the relevant period.

It turns out that the Government intends to proceed with an alternative by introducing legislation whereby any non-compete clause exceeding 3 months will be unenforceable. That doesn’t mean that all non-compete clauses that are limited to 3 months will be enforceable. The usual tests will still apply, i.e. whether it is reasonable having regard to all the facts and whether it goes further than is necessary to protect the employer’s legitimate business interest.

This change will only apply to non-compete clauses which restrict an individual's ability to work for, or establish, a competing business when they leave a job. Employers will still be able to use paid notice periods, garden leave, and non-solicitation clauses to protect their business interests.

We have seen a huge increase in instructions involving post termination restrictions (restrictive covenants) mainly due to more employees working from home and a labour shortage with the effect this has had on salaries. There has been a raft of recent reported cases coming out of the courts (including a rare one from the Supreme Court), which go both ways, proving that each case turns on its specific facts.

This is pretty much all we know at this stage. We will have to wait for the detail before we know the answers to many questions such as, whether a restricted period of 6 months will automatically be guillotined to 3 months before the usual considerations are taken into account or whether it will have retrospective effect. We don’t expect any legislation to be passed in the short term which will give employers time to review their contracts of employment. It is worth emphasising here that a “one size fits all” approach to restrictive covenants may well lead to a challenge over enforceability so it is important to tailor these to the seniority of the employee and the level of sensitive information they have access to.

The rather less controversial restrictive covenants (all be often litigated) found in employment contracts, such as non-dealing and non-solicitation clauses, were not the subject of the consultation and there is no proposed legislation being considered to curtail the use of those restrictions as far as we are aware.

We would add that the proposed legislation only concerns non-compete clauses in employment contracts, not those routinely found in commercial agreements such as share purchase agreements and franchise agreements.