Background and the restraint of trade principle

Contracts of Employment (especially for senior employees) often contain clauses which prevent the employee from working for, or setting up, a competing business, in a particular geographic area, for a period of time (usually 6 or 12 months) after employment ends (a “non-compete” clause).

Such clauses (and other types of post-termination of employment restrictions) are subject to the restraint of trade principle. This means that, as a starting point, they are considered to be void (as being in restraint of trade) and that it is for the employer to show that they are reasonable to protect its legitimate business interests if they are to be enforced by a Court.

Proposals to limit non-compete clauses to 3 months

The Department for Business and Trade published a policy paper entitled, “Smarter Regulation to Grow the Economy” on 10 May 2023 (“the Paper”). This sets out certain proposed reforms of employment law, including legislation to limit the length of non-compete clauses to 3 months. As the Paper acknowledges, non-compete clauses “can play an important role in protecting businesses who invest in their staff”. However, the Paper also recognises that such clauses “can inhibit workers from looking for better paying roles, and limit the ability of businesses to compete and innovate”. It suggests that limiting the length of non-compete clauses to 3 months:

“—will give up to 5 million UK workers greater freedom to switch jobs, apply their skills elsewhere and even earn a pay rise. The change will also provide a boost to the wider UK economy, supporting employers to grow their businesses and increase productivity by widening the talent pool, and improving the quality of candidates they can hire”.

Would limiting non-compete clauses to 3 months effectively be the end of them?

Seeking to enforce non-compete clauses (and other types of post-termination restrictions) by way of an application for an interim injunction is notoriously expensive. Also, the normal costs order at the interim stage (if the Claimant is successful) is “costs reserved”, meaning that the costs of the application will be dealt with by the Court at a later stage-e.g.-at the trial of the action. However, the granting of an interim injunction (practically speaking) often leads to the end of the litigation, without a trial taking place and with the issue of costs being a matter for negotiation. Given this, and as a Claimant who seeks an interim injunction has to give a “cross undertaking in damages” (akin to a guarantee or underwriting of any losses suffered by the Defendant if, at trial, it is found that an interim injunction should not have been granted), will there be any appetite for seeking an order to enforce a non-compete clause? Three months (or, less, by the time the application is heard) is not very long. Would the costs be more likely to outweigh the possible benefits?

Further, the legal tests to be applied in determining whether to uphold a 3 month non-compete by way of an injunction are likely to be the more stringent tests in Lansing Lindhe v Kerr (1991), than the more pro-employer “American Cyanamid” tests. This is because an interim injunction hearing is likely to amount to a final disposal of the matter (i.e. as if it were a trial) because the restriction, or the bulk of it, is likely to have expired by the time of any trial even if a trial is directed (as is the norm in cases involving restrictions) to take place on a speedy basis.

 What about non-compete clauses in other types of contract?

The Paper addresses certain proposals for reforming employment law. Thus, on the face of it, non-compete clauses in other contracts-e.g.-share sale agreements, investment agreements, etc. will not be subject to the same 3 month limitation.

What about other types of restrictions in employment contracts?

The Paper makes plain that:

“Limiting non-compete clauses will not interfere with the ability of employers to use (paid) notice periods or gardening leave, or to use non-solicitation clauses”.

Further, it states that:

“These reforms will not cut across arrangements on confidentiality clauses.”

Although the Paper makes no mention of non-dealing clauses, it is presumed that they will not be subject to a 3 month limitation.

Will the reform of non-compete clauses be retrospective?

Legislation rarely is retrospective. A possible approach of the legislation could be to make any non-compete clause contained in a Contract of Employment which is entered into on or after the date the legislation comes into effect subject to the 3 month limitation. However, such an approach may well not achieve the stated aim of “giving up to 5 million UK workers greater freedom”. An alternative approach would be to deem as unenforceable from the date that the legislation takes effect any non-compete clause (contained in an employment contract) which is longer than 3 months. We will have to see.

Don’t panic

While it is important to be aware of the proposed reforms and to begin to make plans for them, they are not imminent-the Paper states that “The Government intends to legislate when Parliamentary time allows”. That could be some time away!

–  Nick Sayer, Employment Law Partner