In a world still reeling from the effects of the global pandemic and Brexit, the UK Government and the US Federal Trade Commission (FTC) have proposed significant changes to non-compete clauses in employment contracts. These changes, aimed at enhancing labour mobility, fostering healthy business competition, and boosting the economy, are set to redefine the employment landscape in both countries.
Understanding Non-Compete Clauses
Non-compete clauses are contractual agreements that prevent employees from working for a competitor or starting a competing business for a specified period after their employment ends. These clauses are particularly relevant for senior employees who, during their tenure, gain access to confidential information about their employer’s business.
While these clauses serve to protect the employer’s legitimate business interests, they must be reasonable and not overly restrictive,” explains Suliat Jimoh, a Paralegal at Winckworth Sherwood. In the UK and the US, these clauses are typically enforced through interim injunctions.
Proposed Changes in the UK
The UK Government announced its proposed measures on 10 May 2023 in their policy paper “Smarter Regulation to Grow the Economy”. The proposed changes limit non-compete clauses to just three months and apply only to employment and worker contracts.
According to the impact assessment published alongside the response, these changes will affect approximately 7 out of 10 non-compete clauses. The new legislation is expected to grant “5 million UK workers greater freedom to switch jobs, apply their skills elsewhere and even earn a pay rise.”
However, there are still unanswered questions, such as whether the time limit will also apply to garden leave periods, settlement agreements between employers and departing employees, or whether they will apply retrospectively to current non-complete clauses already in place. The Government has stated that the legislation will be introduced ‘when parliamentary time allows’.
Proposed Changes in the US
The US, on the other hand, plans to take more drastic measures by banning employers entirely from using non-compete clauses. The FTC believes that these clauses obstruct employees from “pursuing better opportunities and preventing employers from hiring the best available talent.”
The proposed changes would make it unlawful for an employer to enter or attempt to enter into any non-compete agreement with a worker. The FTC estimates that by banning non-compete clauses, there could be a $296 billion per year increase in wages and an expansion of career opportunities for nearly 30 million Americans.
Implications for Employers
“While the specific details of the proposed changes in both countries are still pending, employers should start contemplating new practical ways to protect their businesses, interests, and particularly confidential information,” suggests Jimoh.
It is likely that employers will still be able to use other types of restrictive covenants such as non-solicitation of or non-dealing with clients or non-poaching of employees, without the time limitations being applied to non-competes. Further, the better utilisation of garden leave provisions, longer notice periods, and confidentiality clauses could also be a way to shield their business interests from being damaged.
Employers could also consider not relying solely on employment contracts but also workplace contracts, which will not be caught by these 3-month limitations.
The proposed changes to non-compete clauses in the UK and the US represent a significant shift in employment law. While the changes are designed to increase labour mobility and boost the economy, they also pose new challenges for employers seeking to protect their legitimate business interests. As the specifics of these changes are still being finalised, employers should stay informed and prepare for the upcoming changes.
For more information or to discuss post-termination obligations or other protections, please reach out to the Winckworth Sherwood Employment Team.