Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.
The UK government has provided further color on its proposed rule to limit non competes to a period of three months post termination.
The UK government has published its full response to consultation. We do not yet have draft legislation, so some questions remain, but we now know:
- The UK will not follow the Federal Trade Commission’s (FTC) proposed outright ban on non competes nor will it follow the model adopted by many EU states, which provides paid non competes. Instead, it will limit non competes to three months post termination.
- The three-month limit will not apply to periods of (so-called) garden leave where employees continue to be employed, are paid, but are not required to work. This means that an employer could, for example, keep an employee from working for a competitor for six months after the employee leaves active employment through a combination of garden leave (paid) for three months and then a three-month (unpaid) period subject to a non-compete.
- The three-month limit will not apply to restrictions seeking to prevent solicitation of clients or non-dealing provisions. In some industries a non-dealing provision can have a similar impact as a non-compete. There is no current plan to include a “functional test” (as proposed by the FTC) to extend the three-month limit to provisions that have the effect of a non-compete.
- The three-month limit is assumed to apply to existing restrictions. However, there is no equivalent to the FTC proposal requiring employers to rescind existing non-compete agreements. Instead, existing agreements are expected to be unenforceable beyond the three-month limit. As such, there will be no legal obligation to review and update contracts although it would be wise to do so.
- The three-month limit will apply only to employment contracts (and certain atypical workers) but will not extend to partnerships, limited liability partnerships or self-employed consultants. Limited liability partnerships have been a popular structure in the financial services sector, and we are likely to see a renewed interest in their use in the City of London as result of this proposal.
- The three-month limit will not extend to non-competes within business sale or shareholder agreements. This would appear to apply to both restrictions that run from the closing of a sale, and restrictions that are expressed to apply from termination of employment.
- The response states it would apply only to non competes “in contracts of employment.” Taken at face value this would mean that the limit would not apply to a non-compete contained in a share or long-term incentive plan.
Any change will require primary legislation to be brought before Parliament. The response states that the Government will bring forward legislation “when parliamentary time allows.” With the next general election on the horizon and a number of influential business figures lobbying hard against the proposal, this curious phrase suggests that there is a chance that this legislation will not make the statute book.
Employers for whom non-competes are a vital part of their business should take advice to consider the options available to best protect their businesses. Others should wait to see what legislation (if any) eventually makes it into law.