Non-compete clauses will have three-month limit in the UK

Non-compete clauses in UK employment contracts will be subject to a statutory limit of three months under new government plans.

The limit will apply to employment contracts and those of limb(b) workers held by dependent contractors.

Limb (b) describes workers who generally have a more casual employment relationship and work under a contract for service.

Changes have not yet been enshrined in law, but the government has promised legislation will be brought forward when parliamentary time allows.

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Speaking to HR magazine Kloe Halls, associate in Linklaters’ employment and incentives team said a three-month limit on non-competes has the potential to be significant for employers, and risks uncertainty until legislated.

One aspect which remains unclear, Halls said, is whether the three-month cap will apply retroactively to contracts, or if the limit will only be imposed on contracts made after the rule comes into force.

She added: “Employers concerned about employees who are a flight risk will want to think about contingencies in the event that their existing non-competes are limited to three months, or even left unenforceable, by the new rules.”

Notice periods and garden leave will not be affected by the limit.

Halls said: “In its announcement, the government made clear that they were not restricting an employer’s ability to use paid notice periods and garden leave, so businesses who are particularly concerned about the three-month limit on non-competes might look to use longer notice periods and garden leave (which are both more difficult for employees to challenge in court) to get around the new restrictions.”

The three-month limit is a response to the government’s consultation on the reform of post-termination non-compete clauses launched in December 2020 as part of efforts to boost innovation, create the conditions for new jobs and increase competition for the UK economy as it recovers from the impact of Covid-19.

Initially, the consultation proposed either to impose an outright ban on the use of non-compete clauses or make employers pay former employees compensation if non-compete clauses had to be used.

The Recruitment and Employment Confederation (REC) opposed these measures arguing they would have a significant detrimental impact on businesses.

Lorraine Laryea, chief standards officer at the REC, told HR magazine the non-profit organisation was pleased the government had reached a middle ground with the three-month limit.

She said: "We are glad to see that there hasn't been an outright ban, and certainly pleased to see there won't be the mandatory compensation."

Laryea said the REC will be updating documentation for its members to make sure they comply with the new limit.

To make sure non-compete clauses are not abused by businesses, she added, there are already other provisions in place.

"The process that exists at the moment, the way that tribunals or courts work, is that a business needs to demonstrate that it does have a legitimate business interest in seeking to protect, and that it has used reasonable measures to try and protect that interest," she added.

"So there are already mechanisms that taper the way that restrictive covenants are used and that stops them being open to abuse."

Up to closing on 26 February 2021, the government received 104 formal responses to its consultation.

The government's official response states: “By limiting the length of non-compete clauses to three months, the government is taking bold action to boost flexibility and dynamism in the labour market, and to unleash greater competition and innovation.

“It will make it easier for workers, including those who are highly skilled, to be able to move to a competitor or to start a competing business. It will also make it easier for businesses to fill vacancies and attract better candidates.”