In May, the Government released its Smarter Regulation to Grow the Economy paper outlining its plans to reform employment law post-Brexit.

The headline-grabbing news was the plan to limit non-compete clauses in employment contracts to three months (although this is not Brexit related, as the EU never regulated non-compete clauses). There were also proposals regarding the rolling up of holiday.

What are non-compete clauses?

Non-compete clauses, also known as ‘restrictive covenants’, are usually incorporated into employment contracts to prevent an employee from entering into competition with an employer after their current employment ends. Many employment contracts specify that an employee is barred from:

• working for a competitor
• setting up in competition on a self-employed basis
• revealing any confidential information or trade secrets learned during employment
• non-solicitation of staff or customers

Typically, these contracts specify a geographic location / industry sector and a specified time. It is not uncommon for these periods to be 6, 9 or 12 months for senior employees. These clauses must be carefully drafted to be enforceable, balancing the employer’s desire to protect legitimate business interests with what is deemed ‘reasonable’ in scope. If a court deems a non-compete clause to be either too wide or unnecessary in the circumstances, it will be unenforceable.

Non-compete clauses were designed to protect an employer’s business interests however they have become a contentious issue in recent years as while employers argue that they are necessary to protect trade secrets and customer relationships, critics claim they stifle competition and inhibit entrepreneurship

New time limits for non-compete clauses

The business and trade secretary Kemi Badenoch has proposed to limit the duration of any non-compete clause to three months. The government says that these changes will give up to 5 million UK workers greater freedom to switch jobs, apply their skills elsewhere and even earn a pay rise.

If the reforms become law, it is likely some employers may try to get around this new time restriction by introducing longer notice periods for key staff and putting them on gardening leave to keep them out of the market for longer than 3 months. This may cost the employer more, but they may consider it worth it if it does not give a competitor an advantage.

The Government has also said the non-compete clause 3 month time limit will not interfere with an employer’s ability to use non-solicitation clauses or confidentiality clauses, meaning these could be for longer periods. However, these can be difficult to enforce, which is why employers have traditionally sought the protection of non-compete clauses.

Questions remain

The paper has not specified if only new employment contracts containing non-compete clauses will be affected after the legislation is introduced, or if it will apply retrospectively to existing contracts. It is also unclear, if it does apply retrospectively, whether existing longer time restrictions will be immediately unenforceable, or automatically reduced to the three month maximum.

These are important points as employers will need to consider their contractual arrangements and be ready to enter into new employment contracts with existing staff where they want compliant non-compete clauses. They will also need to be prepared for employees to resist the changes and ensure any contractual alterations are ‘reasonable’.

On a practical level, the proposed changes may also create inconsistencies with other types of restrictive covenant. For example, an employee working in sales who joins a competitor after three months may remain effectively mothballed if their non-solicitation clauses were longer than this period.

The Government has said it intends to legislate to limit non-compete clauses “when parliamentary time allows”. On that basis, hopefully, further clarity will be given in the interim.

Rolled up holiday pay to be allowed

The Government has also agreed to allow rolled up holiday pay as part of its package of reforms, as it is currently prevented by EU case law. Rolled-up holiday pay is popular with workers because it means their holiday pay gets paid to them with their normal pay, as opposed to it being paid later when they take a holiday.

It is unclear whether the Government will introduce rolled-up holiday pay for employees, but it seems more likely to be limited to casual and temp workers, whose hours and earnings regularly fluctuate, and where calculating holiday pay can be complex.

The Government is already consulting on other reforms to holiday entitlement for workers who work only part of the year or irregular hours. Currently, employees have two separate holiday entitlements – an entitlement to 4 weeks leave based on EU law and an extra 1.6 weeks leave which is a purely UK entitlement. The Government says it plans to merge these two leave entitlements into one pot of statutory annual leave, while maintaining the same amount of overall holiday entitlement.

How we can help

Whilst employers can continue to include longer non-compete clauses in their employment, given the likelihood of future changes, it is more important than ever to ensure that contracts are reviewed to ensure that other restrictive covenants such as non-solicitation and confidentiality obligations are well drafted and notice/gardening leave periods provide the best possible protection.

If you are an employee and your employer has asked you to accept changes to your contract, you should seek legal advice to ensure the proper legal procedure has been followed and the contract is fair and reasonable. Please contact Laura Colebrook on e: l.colebrook@thpsolicitors.co.uk or t: 0118 338 3270.