Government to cap non-competes and make limited changes to TUPE and Working Time Regulations

In its policy paper on Smarter Regulation to Grow the Economy the government has given us a first glimpse of how it plans to reform employment law post-Brexit. The biggest news is the plan to limit non-competes to three months (although this has nothing to do with Brexit, as the EU never regulated non-compete clauses). The government has also agreed to scrap the controversial sunset clause in its Retained EU Law Bill, which could have seen thousands of EU-based laws disappear at the end of 2023. Limited reforms to the Working Time Regulations and TUPE have also been announced. This article discusses the implications for employers.

Non-compete clauses to be limited to three months

The government will limit the length of non-compete clauses to three months, according to the policy paper.

Non-compete clauses are one type of post-termination restriction (PTR) – also known as “restrictive covenants” – that an employer may seek to include in a contract of employment. Non-compete clauses – and PTRs more generally – are governed by case law which has developed over time and provides that PTRs will only be enforceable if they are no wider than is reasonably necessary to protect the employer’s “legitimate business interests” such as confidential information and customer connections. If a court deems a PTR to be either too wide, or unnecessary in the circumstances, it will be unenforceable.

In 2020, the government published a consultation paper exploring multiple options for reforming the law in this area, but largely focused on two main alternatives:

• Option 1 – making post-termination non-compete clauses in employment contracts permissible only where the employer provides compensation (most likely a percentage of basic salary) for the period of restraint.
• Option 2 – making all post-termination non-compete clauses in contracts of employment void and unenforceable.

Today’s policy paper makes clear that the government intends to go with “Option 3” – capping the period of a non-compete to three months through legislation.

There will be no change to wider non-solicitation clauses (other types of PTRs which limit an ex-employee’s ability to poach clients or staff), paid notice periods, garden leave clauses or confidentiality clauses (these are notoriously difficult to police, which is why employers have traditionally sought the protection of a non-compete).

The government hopes that this will provide more flexibility for employees to join competitors or start up a rival business and that the wider economy will benefit from the widened talent pool. A shift towards the greater use of garden leave clauses by employers in response to any new laws could, however, have the opposite effect, because garden leave clauses stop employees from working for any party (even non-competitors) whereas a non-compete wouldn’t extend that far. A focus on non-competes alone also raises potential quirks, for example where an ex-employee in a sales or business development function can join a competitor after three months but would remain effectively incapacitated by ongoing non-solicit and non-deal clauses.

It is unclear if the proposals will apply to non-competes in other types of contracts as well as employment contracts; for example, LLP and partnership agreements or sale and purchase agreements. It is also unclear, at the moment, how the legislation will impact current non-competes that are longer than three months - will they be void or only enforceable up to a maximum of three months? And will any non-compete of up to three months now be valid, even for junior employees, without having to demonstrate that this is proportionate?

More broadly, some employers may start asking wider questions about hiring people in the UK, especially key people in research and development or other top technical roles, if their know-how could end up in the hands of a competitor (or a start-up founded by their now ex-employee) in as little as three months.

This change, unlike the changes to TUPE and the Working Time Regulations below, will require primary legislation so is some way off being implemented. Employers can continue to include non-competes in their employment contracts and other contractual documents, but it is worth starting to consider alternatives.

Rolled up holiday pay to be allowed

In a welcome move, the government has agreed to allow rolled up holiday pay as part of its package of reforms to retained EU law after Brexit. Rolled up holiday pay is currently prevented by EU case law. We had identified this as a key priority for reform, at least for casual workers who work only occasionally. It’s not clear whether the government plans to allow rolled up holiday pay for all workers, although this seems unlikely. The government is already consulting on other reforms to holiday entitlement for workers who work only part of the year or irregular hours and will presumably now put these two proposals together.

Holiday entitlements to be merged

Currently, employees have two separate holiday entitlements - an entitlement to 4 weeks’ leave based on EU law and an entitlement to an extra 1.6 weeks’ leave which is a purely UK entitlement. The government says it plans to merge these leave entitlements into one pot of statutory annual leave, while maintaining the same amount of overall holiday entitlement. This is sensible, although the government will then need to clarify and simplify the rules on, for example, what should be included in holiday pay and when holidays missed due to sickness can be rescheduled, because the rules currently vary depending upon the type of holiday being taken.

Recording of working time not required?

The government says that it will remove retained EU case law requiring employers to record working hours for almost all members of the workforce, saving £1 billion per year. This is presumably a reference to the ECJ’s ruling in CCOO v Deutsche Bank although, as we discuss here, it was not clear that UK employers were impacted by this decision in any case. Employers should also be careful before taking this to mean that no records are going to have to be kept, because national minimum wage rules will still require record-keeping in many cases.

(Very) limited reforms to TUPE

Currently, businesses cannot consult employees directly about TUPE transfers where they do not have appropriate representatives in place. Instead, there is a requirement to elect employee representatives. The government says that it will consult on removing this requirement “for businesses with fewer than 50 people and transfers affecting less than 10 employees”, allowing businesses to consult directly with the affected employees.

The wording is a little unclear here - does it mean that the requirement to elect representatives is removed only in cases where there are fewer than 10 transferring employees and the business employs fewer than 50 people? Or is it removed in either scenario?

Removing the legal requirement for representatives in small transfers is a sensible decision, and we have been calling for reform along these lines. This is, however, a very minor change. As we have written about here, there are many other aspects of TUPE that are ripe for review, including the question of whether TUPE should apply to workers as well as employees, the EU case law suggesting that employees can transfer to multiple new employers and the special restrictions on changing terms after a transfer.

Sunset disappears over the horizon…

The current version of the Retained EU Law Bill includes a controversial sunset clause. As we wrote about here this clause could have meant that thousands of EU-derived laws automatically vanished into the night at the end of 2023 unless deliberately kept or replaced beforehand. The government has now backtracked on this highly controversial clause and announced a new plan to replace the sunset clause with a list of regulations to be revoked.

This is clearly sensible, not least because the sunset clause would have imposed an extremely tight deadline for reviewing EU-derived laws and risked resulting in rushed and badly considered reform. The previous draft of the Bill failed to attract employer support because it started from the assumption that all EU laws should be scrapped and built back up from that, but most employers do not want a bonfire of EU employment rights.

The government has now released the list of EU laws that it plans to revoke at the end of 2023. There are no key employment laws in this list, which will go some way towards reassuring those who thought that the government might be intent on dismantling many workers’ rights. It is arguably a missed opportunity to list the current rules on European Works Councils and other Europe-wide bodies for deletion, as these are in urgent need of repeal. But the government can use its remaining powers in the Bill to make regulations revoking other EU-derived laws at a later date, so this is not necessarily the final list.

…but what will the new dawn bring?

The government has described the proposals in this paper as an initial package, and the first in a series. It has also emphasised that it wants to retain the powers in the current version of the Retained EU Law Bill to continue to amend EU-derived laws. This means that we may see further proposals in the coming months. It remains to be seen if the government will take the opportunity to rewrite or amend other EU-based employment laws or if it will choose to assimilate them into UK law. Even if they are assimilated, the ending of EU supremacy will cause further questions around interpretation going forward. In relation to Northern Ireland, employment law is devolved to the Northern Ireland Executive and it is currently unclear if the changes announced today will extend to Northern Ireland and/or if the Northern Ireland Assembly will follow suit when it is back up and running. Uncertainty for business looks set to continue.