Government Announces Plans to Cap Non-Compete Clauses: What Employers Need to Know

The UK government recently released a policy paper outlining significant employment and legal regulations changes. This announcement, which forms part of a broader set of changes in employment and legal regulations, is poised to impact the business landscape profoundly. 

In summary, the UK government’s recent employment, legal, and regulatory changes have significant implications for you as an employer. Here’s how:

• The three-month cap on non-compete clauses aims to balance employer interests and employee flexibility, but concerns remain about the increased use of garden leave clauses. 
• The introduction of rolled-up holiday pay benefits casual workers, although its extension to all workers is still being determined. 
• Removing the requirement for employee representatives in small-scale TUPE transfers is a minor change, highlighting the need for a broader TUPE review. 
• Replacing the sunset clause in the Retained EU Law Bill with a list of repealed regulations avoids rushed reforms but misses an opportunity to address European Works Council regulations. 

Below, we delve into what this means for you and what lies ahead… 

Non-Compete Clauses: Striking a Balance with Three-Month Limit

According to the policy paper, the government plans to impose a three-month limit on non-compete clauses. These clauses are a type of post-termination restriction that employers include in employment contracts. The enforceability of such clauses depends on case law. If a court finds a clause too broad or unnecessary, it will not be enforceable.

In 2020, the government presented different options for reforming the law in this area. The two main alternatives were requiring employers to compensate for non-compete clauses or rendering all such clauses void and unenforceable. However, the new policy paper reveals that the government has chosen a third option, which involves legislating a three-month cap on non-compete clauses.

This change will not affect other post-termination restrictions like non-solicitation clauses, paid notice periods, garden leave clauses, or confidentiality clauses. The government hopes that the three-month limit will offer more flexibility for employees to join competitors or start their businesses, ultimately benefiting the broader economy. However, there is a concern that employers may increasingly rely on garden leave clauses, which prevent employees from working for any party, even non-competitors, potentially counteracting the intended flexibility of non-compete clauses.

The application of the proposals to non-compete clauses in contracts other than employment contracts, such as partnership agreements or sale and purchase agreements, remains to be determined. It’s also unclear how the legislation will impact existing non-compete clauses longer than three months—whether they will become void or enforceable only up to the three-month limit. Additionally, it’s unknown whether any non-compete clause lasting up to three months will be considered valid without demonstrating proportionality, even for junior employees.

In a broader sense, employers, especially those in research and development or top technical roles, may question hiring individuals in the United Kingdom if their knowledge could benefit competitors or start-ups founded by former employees within a short three-month period.

Unlike the changes to TUPE (Transfer of Undertakings (Protection of Employment) and the Working Time Regulations mentioned below, implementing this change will require primary legislation and will take some time. Employers can currently include non-compete clauses in their employment contracts and other contractual documents, but it is advisable to start considering alternative measures.

Rolled-Up Holiday Pay Gets The Go-ahead

As part of its post-Brexit reforms to retain EU law, the government has positively decided to permit rolled-up holiday pay, which is currently prohibited by EU case law. The allowance of rolled-up holiday pay was recognised as a crucial area for reform, particularly for casual workers with sporadic employment. Whether the government intends to extend rolled-up holiday pay to all workers remains to be determined, although this outcome seems improbable. 

Notably, the government is seeking input on additional reforms concerning holiday entitlement for individuals who work only part of the year or have irregular working hours. It can be assumed that these two proposals will be consolidated as part of the ongoing consultation process, “Holiday entitlement for workers with part-year or irregular working patterns: government consults on new approach.”

Holiday Entitlements: Simplifying through Merging

Presently, employees are granted two distinct holiday entitlements:

• A four-week leave entitlement mandated by EU law.
• An additional 1.6 weeks’ leave entitlement solely governed by UK regulations.

The government intends to consolidate these separate leave entitlements into a unified allocation of statutory annual leave while ensuring that the overall amount of holiday entitlement remains unchanged. This approach is logical, although it will require the government to clarify and simplify various rules. For instance, there is a need to specify what components should be included in holiday pay and establish guidelines for rescheduling missed holidays due to illness, as the current regulations vary depending on the type of holiday taken. 

Recording Working Time: Assessing the Need for Documentation

The government plans to eliminate the requirement for employers to track working hours for most of their workforce. This measure is projected to result in annual savings of £1 billion. UK employers were affected by this decision. 

However, you should exercise caution in assuming that no record-keeping will be necessary, as national minimum wage regulations will still mandate record-keeping in numerous instances.

TUPE Reforms: Navigating the Limited Changes

For example, businesses are unable to consult employees directly regarding TUPE transfers. Instead, you’re required to elect employee representatives. The government is seeking input on removing this requirement for “businesses with fewer than 50 people and transfers affecting less than ten employees.” If you are, it will allow you to consult with the affected employees directly.

The wording in this regard is unclear, raising questions about whether the requirement for elected representatives is abolished solely in cases involving fewer than ten transferring employees and businesses with fewer than 50 employees or if it applies to either scenario. The decision to eliminate the legal requirement for representatives in small-scale transfers is reasonable. However, it should be noted that this change is relatively minor. 

Numerous other aspects of TUPE warrant review, such as the applicability of TUPE to workers in addition to employees, the European Union case law indicating the possibility of employees transferring to multiple new employers, and the specific restrictions on altering terms and conditions following a transfer.

Sunset Clause Replacement: Ensuring Continuity in Retained EU Laws

The current iteration of the Retained EU Law Bill contains a controversial sunset clause that could have resulted in the automatic expiration of numerous EU-derived laws by the end of 2023 unless intentionally preserved or replaced before that. See “What might the Brexit Freedoms Bill mean for employment law?” for more details. However, the government has reversed its stance on this highly contentious clause and introduced a new plan to substitute it with a list of regulations to be repealed.

This revision is undoubtedly sensible, mainly because the sunset clause would have imposed an extremely tight deadline for reviewing EU-derived laws, potentially leading to hasty and poorly considered reforms. The bill’s initial draft lacked employers’ support since it started, with the presumption that all EU laws should be eliminated and subsequently reconstructed. However, most employers do not desire a wholesale dismantling of EU employment rights.

The government has now disclosed the EU laws intended for revocation by the end of 2023. Notably, this list does not include any crucial employment laws, which should alleviate concerns for those who feared that the government might aim to undermine various workers’ rights. However, the opportunity was missed to include the current regulations pertaining to European Works Councils and other pan-European entities for deletion, as these urgently need repeal. Nevertheless, the government can utilise its remaining powers in the bill to introduce regulations revoking other EU-derived laws later, indicating that the current list may need to be more definitive.

It’s essential to stay informed and adapt to the evolving landscape, focusing on balancing business interests and workers’ rights.

At Barnes Law, our team of experienced professionals are dedicated to assisting you in navigating these changes and addressing any concerns you may have. 

Whether you need clarification on the implications of the three-month limit on non-compete clauses, guidance on implementing rolled-up holiday pay, advice on complying with TUPE regulations, or insights on the evolving legal landscape, our experts are here to provide you with the information and assistance you need.