People, Culture and Law Conference 2023 - Restrictive Covenant Reform

Restrictive Covenant Reform Andrea London, Partner

What are restrictive covenants and where are they found?

• Broadly encompasses numerous obligations, including confidential information provisions, non-solicitation of clients or prospective clients, non- dealing, non-poaching of colleagues or key employees, non-employment of the same- as well as noncompete clauses.

• Non-compete is the focus of the impending reforms in UK (and US).

• Found not only in Employment agreements, but SPAs, Shareholder agreements, LLP agreements and Consultancy agreements.

What is a non-compete clause?

• A “non-compete” is a post-termination restrictive covenant intended to prevent a departing employee from working for a competitor immediately following the termination of their employment.

• Default position is non-competes are void and so unenforceable as a restraint of trade.

• To be enforceable, the clause must be reasonable and go no further than necessary to protect the employers’ legitimate business interests.

• Usually enforced through interim injunction.

Non-competes - drafting •

Must consider the legitimate interest to be protected: goodwill, confidential information, period of time of influence over customers or colleagues?

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Duration: currently no statutory maximum, however non-competes over 12 months are very rare. 12 month duration is typically only appropriate for the most senior executives.

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Must be limited to competing with the business the employee was involved with or had confidential information about (generally within the last 12 months of employment)

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Garden leave off-set almost always included –but not an absolute rule (Credit Suisse Asset Management Limited v Armstrong & others)

Non-competes: some tricky issues • In UK, generally not “paid” periods, can be up to 12 months duration.

• Not enforceable if employer is in repudiatory breach of contract.

• Consideration is required.

• Generally no additional consideration needed where restrictions are included in original employment agreement (ie at outset).

• Additional consideration is needed when amendments are sought to be included later. A simultaneous pay rise, for example, has been held to be sufficient consideration (Decorus Ltd v Penfold)

So, what's happening?

In the UK (and also the US), there are significant proposed changes to post termination covenants in employment contracts.

The Government announced its proposed measures on 10 May 2023 in their policy paper “Smarter Regulation to Grow the Economy” with further details published by the Department for Business & Trade on 12 May 2023.

The changes are intended to empower employees and allow them to change jobs more readily – which mobility is expected to increase healthy business competition and boost the economy.

Proposed changes (1) • New legislation has been proposed which, if enforced, would limit the length of non-compete clauses to just three months.

• It will apply only to employment and worker contracts (and not wider workplace contracts, such as partnership agreements, LLP agreements and shareholder agreements).

• The 3 month cap will not apply to other restrictive covenants – for example, non-dealing and non-solicitation clauses.

• The

common

law

principles

reasonableness) will still apply.

of

enforceability

(based

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Proposed changes (2) • Unfortunately still lots of unanswered questions, however including whether the time limit will also be applicable 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.

• It is uncertain exactly when the proposed changes will come in force, as the Government have stated the legislation will be introduced ‘when parliamentary time allows’.

Summary note for employers • Employers would be wise to plan ahead (even though no confirmation yet of the implementation time frame).

• Consider now the better utilisation of other covenants, extensions of notice period clauses and garden leave provisions.

• Look at other agreements in which non-competes are not capped; so they can be included there instead; for example an LTIP or shareholder agreement if equity is given.

• Consider confidential information definitions and confidentiality clauses, and whom in your business has access to this potentially damaging information and act accordingly.