How will the non-compete ban affect law firms?

The government has published plans to constrain the ability of businesses to prevent departing workers competing. Currently, UK non-compete clauses (NCCs) have no statutory limits and enforceability is policed by principles derived from case law. Driven by a purported desire to enhance worker mobility, innovation, growth and competition, the plan is to introduce a three-month limit on NCCs. 

Details were published on 12 May in the ‘Response to the Government consultation on measures to reform post-termination non-compete clauses in contracts of employment’.

What we know:

1.    The remit of the cap will be limited to NCCs in contracts of employment and worker contracts.

2.    The reforms will not apply to NCCs in wider contracts such as shareholder agreements, partnership agreements and LLPs (notwithstanding recognition of LLP members as workers in case law) where it is suggested the balance of bargaining power may be different.

3.    The cap will not apply to other restrictive covenants – for example, non-dealing and non-solicitation clauses.

4.    Common law principles of enforceability based on reasonableness will still apply to the other restrictive covenants and to NCCs of up to three months.

5.    The government intends to provide guidance to enhance transparency.

What is still unclear:

1.    When the changes will be implemented depends on when ‘parliamentary time allows’. Whether these will go through before the next general election depends on how much of a priority they are for the existing government. Employers may want to hold-off changing contracts until there is more clarity, but be ready to act swiftly once we know more.

2.    Will garden leave periods be included as part of the three-month limit on the NCC or will garden leave be uncapped with up to three months’ NCC on top?

3.    Will employers be expected to update contracts which contain NCCs exceeding three months or will the government facilitate a less cumbersome process?

4.    What are the demands on employers who want to strengthen other contractual terms to plug the gap created by the three-month limit?

5.    Will the cap apply retrospectively to existing NCCs? Will they be completely voided or only enforceable up to three months? What about restrictions which are already part-way through?

6.    Will the cap apply to NCCs in settlement agreements of departing workers?

Overlooked consequences and considerations when advising   

Employers who use longer NCCs will want to find other ways of protecting their business and may seek to make changes to contracts.

Employers for whom it is financially viable may already be considering increasing notice periods and garden leave provisions to keep highly skilled and sought-after personnel out of the market for longer. While this would mean employees will be paid for the duration of the extended garden leave, it could have unintended consequences.

Typically during garden leave, because the individual is still employed, they are even more restricted in the activities they are allowed to do. In contrast to an NCC, workers on garden leave may be subject to limits on who they can communicate with, where they can go, required availability, and, crucially, are normally prohibited from doing any work at all, competitive or not.

If employers seek to extend garden leave to cover the period lost by the curtailed NCC this could have a detrimental impact on individuals who may see their skills atrophy. Mental health could also suffer as they unable to put professional skills to use and prevented from communicating with colleagues and clients. Ongoing implied duties of fidelity and good faith would also continue, limiting the preparatory steps the individual can take to advance their next job.

While this might only impact businesses which can afford to pay extended notice periods for staff not actively contributing to the business, it might act to the detriment of the government’s stated objectives and stagnate competition if those highly skilled workers are sat for longer periods not working at all.

Could this result in further reforms to regulate garden leave? Will departing employees look for ways to escape contracts sooner and avoid lengthy periods in the garden? Might employees decide they are better off leaving in breach of contract and find ways to assert constructive dismissal and approach new employers to make up any lost remuneration and forfeited benefits? Could this spark ancillary litigation, think economic torts, inducement and the like?

We predict employers will look to make increased use of other contractual arrangements to protect business. For example, more reliance on other restrictive covenants, such as non-solicitation or non-dealing clauses, enhanced confidentiality and intellectual property protections. They could also increase the use of deferred benefits, by removing deferred compensation from employees who leave to join a competitor or even look to reduce remuneration during garden leave.

Employers may also want to make greater use of agreements outside of the employment/worker contract where the cap does not apply to an NCC, for example, shareholder agreements, long-term incentive plans and options schemes.

The cap risks making it harder to attract and retain foreign business, serving to undercut the rationale behind the planned changes.  

With regard to enforcement action, we are likely to see more aggressive litigation strategies employed, with injunctive relief being sought promptly. As speedy trials before an NCC expires may be difficult, the court is likely to be asked to engage more readily with the merits at the injunctive relief stage.

With so many issues overlooked, more thought is needed before the cap is introduced.

 

Shoshana Bacall is legal director at Fox & Partners Solicitors, London