Non-compete curbs could push City firms towards garden leave

City employers could make greater use of garden leave and deferred bonuses under government plans to curb non-compete clauses, employment lawyers have warned, potentially limiting the impact on skilled workers’ ability to change jobs.

Andy Burnham announced plans for legislation covering non-compete restrictions and lengthy notice periods at the Innovation Nation Summit last Friday. The proposals seek to make it easier for highly skilled employees to move between businesses, City AM reported.

What happened

The announcement targets contractual restrictions that can prevent departing employees from joining competitors. These provisions are common in technology, finance and insurance, where employers depend on specialist expertise and seek to protect intellectual property.

For affected workers, the restrictions can determine both which employer they can join and when they can start. Enforcement can hold up career moves even after an employee has decided to leave.

The prospect of further changes has prompted resistance in parts of the City. Employers are concerned about losing staff and commercially sensitive information while also preparing for wider changes to employment rights.

The distinction between a restriction after employment ends and a paid period before departure is central to the alternatives lawyers are discussing. Removing or narrowing one contractual mechanism would not necessarily remove the delay before someone can work for a rival.

The background

The Department for Business and Trade launched a consultation on restrictions on non-compete clauses last year, with responses closing in February. That process gave employers and their advisers an opportunity to consider how contracts might need to change.

By August, lawyers including David Palmer, a partner at Addleshaw Goddard, were already helping clients examine alternatives in anticipation of government action. The latest announcement therefore follows preparatory work rather than presenting businesses with an entirely new issue.

Garden leave keeps an employee on the payroll during their notice period after resignation or dismissal, while requiring them to remain away from work and carry out no duties. It can delay a move to a competitor without relying on a restriction that takes effect after employment has ended.

Google DeepMind provides an example of how extensively that mechanism can be used. It was reported last year to have increased garden leave from six months to 12 months for departing UK-based employees working on sensitive projects, including Gemini.

What people are saying

Mark Callaghan, a senior associate at Littler, said many City employers regard non-compete provisions as an important safeguard. Their concerns extend beyond intellectual property to the customer relationships, commercial knowledge and business strategy held by key employees.

Palmer argued that existing case law already limits the use of unreasonable non-compete clauses. His position is that employers do not currently have unrestricted freedom to impose whatever conditions they choose.

He expects businesses that routinely use non-competes to turn increasingly to garden leave because it can produce a similar practical result. In his assessment, companies will look for other contractual ways to protect their interests rather than simply abandon restrictions on employee movement.

Palmer also said longer notice periods can benefit employees because they remain paid for longer. That creates a distinction for policymakers between an unpaid restriction on taking another role and a delay during which salary continues.

What happens next

Lengthy notice periods are also within the scope of the announced plans. Palmer nevertheless doubts that intervention would eliminate every method employers can use to prevent or postpone moves to competitors.

Financial incentives are another option. Some City firms have sought to defer and restructure bonuses, giving staff a financial reason to remain with the business rather than relying solely on contractual barriers to departure.

Further stages of the Employment Rights Act are due to take effect next January. Employment lawyers have been advising businesses on those changes and on alternative contractual arrangements, while the wider compliance agenda also includes right-to-work rules extending to subcontractors.