In this news alert, Senior Partner Sarah Chilton discusses restrictive covenants, in particular non-competes, and what partners and LLP members should consider following the UK Government’s consultation on reforming non-compete clauses.
You may have seen recent news and heard discussions about reform of non-compete clauses in the UK. It follows quickly proposals in the US to curb the use of non-competes with the Federal Trade Commission proposing a complete ban on non-competes. We have discussed the role of non-competes recently and in particular in relation to team moves, and in that article and the 10-Minute Talk you can find out more about the use of restrictive covenants in the LLP context, and the law relating to team moves.
Non-competes are one of a variety of restrictive covenants which employers and firms impose upon partners and employees. Non-competes, contrast clauses which seek to prevent solicitation of clients, for example, purport to stop someone working for a competitor for a period of time after they leave. They can only be enforced in certain circumstances, which are explored in more detail by our partner David Fisher, here.
The UK Government commenced a consultation in 2020 on reforming non-compete clauses. The Government wanted to consult on reform of non-competes “to maximise opportunities for individuals to start new businesses, find new work and apply their skills to drive economic growth” and explore whether such reform could “boost innovation”. The consultation response was published in May of this year and recommends legislation to limit the duration of non-competes to 3 months. This is not proposed to impact other measures which businesses can take to protect their confidential information, connections and trade secrets, such as non-dealing and non-solicitation clauses, and the use of garden leave (which we may see increase in the event the proposed 3 month limit is brought in).
Notably, the proposal is stated not to apply to partners, one reason being that it would be too complicated to apply them to “wider workplace contracts” which includes LLP agreements and shareholder agreements. Having said that, the response does also say that the provision would apply to “limb b workers” which includes LLP members (see “Supreme Court rules that LLP members are “workers” for purpose of whistleblowing protections“). It is assumed, although it is unclear, the proposal would not apply to partners and LLP members, despite the inclusion of limb b workers, but the detail of any legislation remains to be seen. Before we even get there, there needs to be parliamentary time to pass any legislation, and it is not clear if that will be possible before the next General Election.
Do you need to do anything now?
For now, nothing has changed. Whilst employers and firms should regularly be reviewing their restrictive covenants, both in terms of the drafting and the scope, there is no need at present to be considering reducing the length of non-competes if they work for your business, and are likely to be enforceable. As David discussed in his article earlier this year, where partners and LLP members are concerned the law is uncertain, and complex, so care is required when including non-competes in agreements. Existing public policy and case law remains in force until any changes are passed through parliament. We discussed the current law on non-competes and considerations around enforceability specifically in the context of partners and team moves here and here. As is noted in that article, the leading case relating to non-competes and partners dates from 1984, way before the Limited Liability Partnership Act was even in contemplation!
It is likely that the position for LLP members will remain the same as a result of this Government proposal, unless and until there is further case law, clarifying the approach courts and arbitrators are likely to take to enforcing such clauses against departing partners and LLP members.
You can read the full Government response here.
Find out more about how we can assist you with Partner Restrictive Covenants here.
If you have any questions arising from this alert or wish to discuss restrictive covenants more generally, please contact Partners Sarah Chilton or David Fisher, who specialise in partnership and employment law.
