Government announces plans to limit the length of non-competes and change to TUPE consultation requirements
Market Insight 19 May 2023 19 May 2023
UK & Europe
Employment, Pensions & Immigration
Non-compete restrictions will be limited to three months and employers will not always have to elect employee representatives for small-scale TUPE transfers under plans announced by the government. We look at the proposals and what they mean for employers.
Non-compete clauses to be limited to three months
The government has outlined plans to limit the length of non-compete clauses to a maximum of three months through legislation.
Non-compete clauses (a form of “restrictive covenant”) are inserted into employment contracts to restrict an individual’s ability to work for a competing business, or to establish a competing business for a defined period after termination. They can play an important role in protecting the employer’s business interests.
There is currently no legislation that limits the use of non-compete restrictions, but the courts have stepped in to put parameters around how they can be used through case law. Non-compete clauses (and other post-termination restrictions) are only enforceable if they are no wider than is reasonably necessary to protect the employer’s “legitimate business interests”, such as confidential information and customer connections. If a court considers the restriction to be too wide or unnecessary in the circumstances, it will be unenforceable.
The government is now planning to legislate to introduce a three-month limit on the length of a non-compete clause. Non-competes that don’t exceed the three-month limit will still only be enforceable if they go no wider than reasonably necessary to protect the employer’s legitimate business interests.
The government estimates that capping the length of non-competes in this way will give up to 5 million UK workers greater freedom to switch jobs, apply their skills elsewhere and even earn a pay rise.
The plans are set out in the government’s response to its consultation on non-compete clauses. The original consultation paper exploring options for reform in this area was published in 2020.
Other options under consideration were banning the use of non-competes altogether or requiring employers to compensate employees during the period of the non-compete restriction. However, the government has decided not to go ahead with either of those options.
What does this mean for employers?
Employers will still be able to use confidentiality clauses, notice periods or gardening leave to protect their businesses from former employees acting in competition with them.
They will also still be able to use other types of post-termination restrictions of longer lengths, such as non-solicitation clauses which limit an ex-employee’s ability to poach clients, staff or suppliers. However, many employers rely on non-compete clauses because other less restrictive measures can be difficult to police in practice so these proposals may be unpopular with them.
The proposals will only apply to employment and worker contracts. They will not apply to non-competes in partnership/LLP agreements, sale and purchase agreements and shareholder agreements.
What is not clear is whether the proposals will apply to non-competes in settlement agreements, or other types of documents such as those dealing with bonuses and LTIPs. Hopefully the draft legislation will clarify this.
It is also unclear how existing non-competes that exceed three months will be affected by the new legislation. Will they be void or will they still be enforceable but only for a maximum of three months?
The new legislation will be introduced ‘when Parliamentary time allows’. It is likely to take some time before it is in force. In the meantime, employers may wish to review their current post-termination protections and consider how best to safeguard their business interests if the proposals do go ahead. They will also need to update their employment contracts in due course, if needed.
We may well see a trend towards longer notice periods and the usage of garden leave for more extended periods if the proposals go ahead.
The three-month limit will apply to Great Britain (England, Wales and Scotland), as employment law is devolved to Northern Ireland.
The Transfer of Undertakings (Protection of Employment) (TUPE) Regulations protect employees’ employment rights when the business or undertaking they work for transfers to a new employer. TUPE may also apply when a business changes owner or a service transfers to a new service provider.
Currently, micro businesses with fewer than ten employees may inform and consult affected employees directly if there are no existing employee representatives in place.
Larger businesses, however, are required to arrange elections for affected employees to elect new employee representatives if they are not already in place, which can add to the complexity of the TUPE transfer process.
The government is proposing to remove the requirement to elect employee representatives for the purpose of TUPE consultation for:
Businesses with fewer than 50 employees, and
Businesses of any size involved in a transfer of fewer than 10 employees.
Direct consultation with employees would only be allowed if no existing employee representatives were in place. If employee representatives were already in place, then the employer would still be required to consult with them.
What does this mean for employers?
Removing this requirement for businesses with fewer than 50 people and transfers affecting less than 10 employees and allowing businesses to consult directly with the affected employees will simplify the TUPE process in relation to small-scale TUPE transfers and is a welcome proposal.
This proposal represents a relatively minor change to TUPE and many employers will not be affected by it. There are many other aspects of TUPE that could potentially be reformed, but it seems for now TUPE will largely stay the same.