The UK government has proposed introducing a statutory limit of 3 months on non-compete restrictions. A non-compete is a type of post-termination restriction that prevents former employees from working for a competitor for a prescribed period after their employment ends. So what are the implications for senior executives?
Who is affected?
The proposed reform would only apply to non-compete clauses in employment and worker contracts. This means that it would not apply to partnership agreements, LLP agreements and shareholder agreements. So where employees enter into parallel shareholder and employment agreements with the company that they work for, the company would be able to circumvent the statutory limit by including a longer non-compete in the shareholder agreement. Alternatively, companies may incorrectly designate individuals as LLP members, requesting that they enter into an LLP agreement, which is an employment agreement in all but name, but with a non-compete that is longer than 3 months.
It is currently unclear whether the proposal will apply to settlement agreements, as this is not addressed by the government in its proposal. It is also unclear whether the proposal would impact all existing non-competes that are longer than three months or only those entered into after the legislation is introduced. The former approach would cause significant legal uncertainty and instability for businesses.
When will the proposed reform come into effect?
The government has not specified a timeframe for the proposed reform and it is not currently an employment bill before Parliament. This means that there are still various legislative hurdles to overcome before it can become law. The prospect of a general election at the end of next year also creates uncertainty; the Labour party has not announced whether it will follow this policy.
What are the implications for senior executives?
1. Bargaining tool. Senior executives negotiating new service agreements can refer prospective employers to the proposed reform to argue that they should not be subject to a non-compete longer than 3 months. This may be contentious, particularly in the insurance sector, where non-competes can be up to 12 months in length to prevent exiting employees from poaching clients just before their annual renewal window. Similarly, in the financial services sector, non-competes tend to be longer given executives' level of exposure to clients. However, it remains a useful bargaining tool, as senior executives can argue it is unreasonable for their service agreement to include a non-compete that will be banned in the near future.
2. Longer garden leave and notice provisions and/or other restrictions. Senior executives should be wary of prospective employers seeking to introduce a non-compete "by the back door", by imposing longer or more restrictive non-dealing and non-solicitation provisions, notice periods and garden leave provisions. These measures can have the same practical effect as a non-compete. By preventing senior executives from dealing with or soliciting clients or prospective clients, they cannot carry out duties that would be central to their new role, meaning they are effectively prevented from working for a competitor for the length of their other restrictions. They can also be placed on garden leave for their entire notice period, which is significant where that notice period is 6 to 12 months and means they are prevented from working for any business rather than just competitors.
3. Remuneration schemes and other contractual documents. Senior executives should ensure that they take legal advice on deferred remuneration schemes, LTIPs or the LLP and shareholder agreements referenced above, so they understand whether they are subject to any other non-competes outside of their service agreement, and whether they are enforceable.