Is the UK adopting a Californian approach to restrictive covenants?

The weather isn’t the only significant difference you could strike between the UK and California; these jurisdictions’ respective approaches to post-employment restrictive covenants are also in stark contrast… Or are they?

In California a post-employment non-compete restriction isn’t typically enforceable, whereas in the UK, subject to several important tests, a non-compete restriction can be enforced.

A recent example of successful UK non-compete restriction enforcement is the Court of Appeal decision in Boydell v NZP Pharma Ltd. The Court of Appeal corroborated the High Court’s decision to grant an interim injunction compelling Mr Boydell to comply with his non-compete restriction. Mr Boydell was barred from working for any competing business of his ex-employer, NZP Pharma Ltd, for a 12 month period.

UK economy and innovation capabilities

The UK government announced, in May 2023, plans to introduce legislation restricting the length of a post-termination non-compete restrictive covenant to three months. Clearly, this is a far shorter duration than the period during which Mr Boydell’s employment activity was restricted. Thus, is the UK gradually aligning itself with the Californian approach to non-compete restrictions?

The UK Department for Business & Trade’s report on non-compete restrictions states that c.5 million employees across the UK labour market are subject to a non-compete restriction. Whether these restrictions are enforceable, in part subject to their drafting, and are actually enforced, dependent on the level of commercial risk to the employer and its litigative appetite, is another matter.

However, these are c.5million individuals who, if/ when this proposed legislation comes into force, would only be restricted for a three month post-employment period. Whilst this will commercially alarm some employers, others would argue that the UK’s economy and its innovative capabilities, could be materially boosted by the improved flow of talent.

What’s changing?

If the UK government’s proposals are given life via new legislation, employers will only be able to restrict employees from working for competitors:

• During their employment – including within paid garden leave, or whilst they’re working their notice
• For three months following the termination of their employment.

Other restrictions

These plans relate to non-compete restrictions only and it’s anticipated that non-solicitation, non-dealing, and non-poaching restrictions 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 actions

This recent announcement by the UK government is likely to result in:

• Increased thought by employers given to the contractual obligations at the beginning of the employment relationship
• Longer notice periods
• An increase in employers utilising garden leave provisions
• A decreased use of employers paying in lieu of notice
• A larger focus on IT forensic capabilities
• Increased efforts on tailored confidentiality provisions and post-termination non-solicit, non-deal and non-poach restrictions
• Potentially the extinction of a non-compete restriction altogether. After all, just how useful is a three month restriction in some circumstances?

Successfully future proofing

What’s becoming clear 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, place them on garden leave. In many scenarios employers may question why they would pay an employee in lieu of notice and inadvertently allow them access to the market, when they could maintain control over them, including who they contact, for a period and, crucially, without expending much more than they would have done paying them in lieu.

To future proof their 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
• 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 remarkably original for some employers. Increasingly, employment lawyers 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 said employer need to restrict an employee from earning a living elsewhere altogether? Arguably not, in some cases.

Employer takeaways

This is a prime opportunity for employers to:

• Re-assess notice periods of relevant employees and new starters, in addition to looking at contractual garden leave provisions
• Ensure confidentiality provisions are fit for purpose, whilst considering the business’s IT forensic capabilities, i.e. the ability to check whether confidential information has been emailed, downloaded, or otherwise exploited
• Revisit restrictive covenants to ensure they have a good chance of being enforceable
• Stay cognisant 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.