Farewell to non-compete restrictions?

The government’s recent announcement to introduce legislation restricting the duration of non-compete restrictive covenant post-termination of employment has got us thinking… Is this the gradual demise of the non-compete restriction?

What’s changing?

Under the government’s latest plans, employers would only be able to restrict employees from working for competitors:

• During their employment (which includes during periods of paid garden leave or whilst employees are working their notice period), and
• For a maximum of 3 months following the termination of their employment.

This proposed post-termination 3 month limit on a non-compete restriction isn’t intended to affect garden leave or notice periods. The intention is that it’ll be a standalone restricted period.

How might employers respond?

Clearly, prospective implementation of this new legislation will focus the mind of employers that bit further. In turn, we anticipate seeing:

• Increased thought given to the contractual obligations at the beginning of the employment relationship
• Longer notice periods
• An increase in the use of garden leave provisions
• A decreased use of paying in lieu of notice (more on this below)
• A larger focus on IT forensic capabilities (also mentioned below)
• Increased efforts on carefully tailored post-termination non-solicit, non-deal and non-poach provisions, as well as confidentiality provisions, and
• Possibly the removal of a non-compete restriction altogether. After all, just how useful is a three month restriction in some circumstances?

Successfully future proofing the business

What is clear from this potential change is that, to protect their business, employers may need to increasingly stick their money where their mouth is.

We expect to see fewer employers routinely paying exiting staff in lieu of their notice and instead, placing them on garden leave. Consider why you would pay an employee in lieu of notice and inadvertently allow them access to the market, when you could maintain control over them (including who they contact) for a period – and crucially, without expending much more than you would have done paying them in lieu. Paying in lieu of notice suddenly seems (in some situations) far less commercially attractive to employers.

To future proof the business, employers may look at increasing notice/garden leave periods (and treating payment of these periods as “sunk costs”) in exchange for:

• Having full control of an employee they consider to be a potential commercial threat for a guaranteed period, and
• Removing that individual from the market for the same period, allowing the business to get its ducks in a row before the individual is “released into the wild”.

This way of thinking isn’t necessarily remarkably original for some employers. Increasingly,  as employment lawyers we are questioning the necessity of a non-compete with clients. If a business has the right protections to prevent an employee from misappropriating confidential information and intellectual property, and the employee is restricted from disturbing client/customer, supplier, and employee relationships with the business for a period, does an employer need to restrict an employee from earning a living elsewhere altogether? Arguably not, in some cases…

What about other types of restrictive covenants?

The government’s current plans relate to non-compete restrictions only. Whilst the recent announcement is technically silent on non-deal restrictions, it’s anticipated that non-solicitation, non-dealing, and non-poaching restrictions (in addition to confidentiality provisions) won’t be affected. These unaffected restrictions will continue to be enforceable if they are:

• Reasonable
• Proportionate, and
• Go no further than is necessary to protect a legitimate business interest(s).

Employer top tips

This update comes at a useful juncture, and is a key opportunity for employers to take stock and:

• Revaluate notice periods of relevant employees and new starters, in addition to associated contractual garden leave provisions
• Given confidentiality provisions may hold greater importance, ensure these are fit for purpose, whilst considering the business’s IT forensic capabilities (i.e. the ability to check whether confidential information and intellectual property has been emailed, downloaded, printed, shared or otherwise misappropriated or exploited)
• Revisit the drafting of restrictive covenants to ensure they have a good chance of being successfully enforced, and
• Stay alive to the fact that restrictive covenants should be re-visited from time to time, given they should be drafted for circumstances appropriate at the point in which the parties enter into them. As employees take on more responsibilities and are promoted, and as the business evolves, tweaks to restrictions should be made to continue to give employers the best chance at successfully enforcing the same.

If it’s time for a post-termination restriction review, or you’d like to discuss your future business protection needs, we’d be happy to provide specialist support. Please do get in touch.