In brief
- Speaking at the Innovation Nation Summit in Manchester earlier today, Prime Minister Andy Burnham confirmed that the Government will legislate to restrict the use of non-compete clauses in employment contracts.
- He described the move as the "Bosman ruling for the innovation sector", citing the 1995 European Court of Justice decision that famously allowed footballers to move freely to another club at the end of their contract without a transfer fee.
- The announcement comes nearly a year after the Government published a working paper setting out proposals to reform the law on non-compete clauses in employment contracts.
- The options in the working paper range from an outright ban to statutory duration caps and salary or company-size implementation thresholds.
- Whilst the Prime Minister's statement is a clear signal of intent to legislate, the detailed legislative proposals have not yet been announced.
Why is the Government reforming non-compete clauses?
The Government's Working Paper identified four objectives behind the proposed reform: boosting labour market dynamism, reducing barriers to recruitment, promoting competition and innovation, and protecting workers from extended periods out of the labour market. The Prime Minister's announcement today echoes this, characterising non-competes as a "drag on innovation" that leave workers "held back and unpaid" and prevent the UK's most talented people from starting new ventures or joining competitors.
Why changes to non-compete clauses might be made?
The options in the working paper, and which may inform any legislation, include:
- a statutory cap on the permitted duration of non-compete clauses;
- an outright ban on non-compete clauses;
- a ban on non-competes below a specified salary threshold;
- a statutory duration cap that varies by company size (for example, a shorter cap for larger employers and a longer cap for smaller employers); or
- a combined approach involving a ban below a salary threshold together with a duration limit above it.
What do employers think about non-compete reform?
We surveyed our employer clients on their use of non-competes and their views on reform in light of the Government's working paper, and the results suggested that change of this kind would be unwelcome for most businesses.
The most common preference was for the Government to maintain the status quo and refrain from changing the law in relation to non-competes. There was very little appetite for an outright ban, which was considered unnecessary and harmful to business, especially SMEs/early-stage companies. Similar sentiments were expressed in relation to restrictions generally, with respondents noting that restrictions on non-competes could redirect investment away from the UK. Proposals to vary restrictions by reference to employer size and employee salary were also unpopular. Such proposals were considered blunt tools that failed to appreciate the multifactorial and nuanced reasons for non-competes. The Government's most popular proposal was for a statutory limit on the duration of non-competes, with respondents expressing preferences for 6-month or 12-month caps.
What should employers do now to prepare for non-compete reform?
Although the detail is still to come, employers that rely on non-competes can start preparing now by:
- Reviewing existing non-compete clauses, including their duration, scope and the roles to which they apply, to understand the potential exposure when restrictions are introduced.
- Considering whether key protections (confidential information, client connections, team stability) can be secured through other means, such as non-solicitation or non-dealing clauses, garden leave, and incentive structures.
- Looking out for the detailed legislative proposals. It is hoped that any statutory cap or ban will distinguish between existing and future arrangements, so the timing of recruitment, promotions and contract renewals may matter.
- Engaging in any further consultation, directly or through trade bodies, if you have concerns about how reform will affect your business or sector.
In the meantime, please get in touch if you would like to discuss how these proposals could affect your business.