New law: Government clarifies proposed restrictions on employee non-compete clauses

Non-compete clauses are contractual terms which stop an ex-employee/worker from competing with their former employer after they leave – for example, by working for a rival, or setting up in competition on their own account. Most non-compete clauses are currently for six or twelve months.

Points clarified are:

• The three-month limit will apply to workers as well as employees.
• It will not apply to agreements connected with the workplace but not amounting to an employment contract, such as Limited Liability Partnership agreements (even though a member of an LLP may also be a worker), shareholders’ agreements or long-term incentive plans. The rationale is that the relative bargaining power of parties to such contracts are different from those in the employee/employer relationship.
• The limit will not apply to other restrictive clauses, such as non-solicitation or non-poaching clauses.

The government has also said it will publish guidance on use of non-compete clauses and the law relating to them.

Remaining uncertainties include:

• Whether the limit will apply retrospectively to existing non-compete clauses.
• Whether, if it does, such an existing clause will be completely void, or treated as if it is subject to the three-month limit.
• Whether the limit will apply to a non-compete clause in a settlement agreement entered into to resolve an employment dispute.
• The relationship between the new limit and gardening leave – the government has already said gardening leave will be unaffected, but this leaves it open to employers to impose long termination notice periods and put employees on gardening leave during such periods to keep them out of the marketplace.

Operative date

• To be announced

Recommendation

• Employers should monitor for further developments, prepare to review their employees’ terms of employment, and consider alternative protections such as longer notice periods and gardening leave.