Changing employee mobility to drive growth and competition

Proposed reform of non-compete restrictions

In an M&A process, non-compete clauses for the target’s employees can protect the buyers from value leakage. Restricting employees from joining a competitor for a specific period of time prevents loss of key talent to other market players. However, the UK government is seeking to address the impact of this reduced employee mobility on competition in the market by proposing a statutory limit of three months on non-compete clauses in employment contracts. In doing so, it is rejecting the more European style approach of compensation paid to the employee for the period of the restrictions or the US proposed approach of an outright ban. 

No room to stumble

Care should be taken to identify potential issues of deemed employment.

Dealmakers can breathe a sigh of relief that the government’s proposal applies only to contracts for employees and workers and is not intended to apply to non-compete clauses in other types of agreements such as SPAs, partnership agreements, limited liability partnership (LLP) agreements and shareholder agreements. However, care should be taken to identify potential issues of deemed employment, with previous case law supporting instances where, for example, the partner of an LLP was determined to be a worker. In such a circumstance, it would seem at least possible that a non-compete clause in an LLP agreement lasting more than three months could be unenforceable against an LLP member who is also a worker.

The reform

If the reform goes ahead, it would apply to new employment contracts put in place for the management team at completion. 

The application of the reform to non-competes in other forms of arrangements – such as consultancy agreements, non-executive appointment letters, and settlement agreements – is less clear but it is anticipated they will be excluded. This is subject again to possible considerations that the individual could be deemed to be an employee and whether it would be possible in any event to impose longer non-compete restrictions in a settlement agreement, where they would not be permitted in the underlying employment contract (if the proposed reform proceeds). 

One key point which is currently unclear is whether the reform would apply to non-competes that are already in place, but our working assumption is that it would, meaning that, for example, a 12 month non-compete would be limited to a period of three months. The government has still to confirm the position on this point. If our assumption is right, employers may want to look into using indirect restraints within deferred remuneration schemes, equity arrangements or long-term incentive plans, where a non-compete clause is frequently factored in to “good leaver” definitions. It is unclear whether indirect restraints would be caught by the reform, but the impact assessment for the reform suggests that they would not be.

Safeguarding your business

Other restrictions such as non-solicitation, non-dealing and confidentiality protections will not be affected by the government’s proposals.

Organisations that wish to rely on post-termination restrictions with ex-employees to protect their businesses need to assess the potential impact of the government’s proposals. As with current post-termination restrictions, employers still need to establish that the restrictions go no further than is necessary to protect a legitimate business interest. Restrictions applied for three months or less will not automatically be enforceable. In addition, other restrictions such as non-solicitation, non-dealing and confidentiality protections will not be affected by the government’s proposals, so organisations may wish to place more reliance on these types of restrictions instead, as well as the indirect restraints mentioned above. Organisations can also make use of notice periods and garden leave provisions as other business protection measures.