UK reform of non-compete clauses - increased worker mobility for the tech sector

Against the backdrop of the post-Covid 19 landscape, the cost of living crisis and in a move intended to boost competition and innovation, the UK government has announced in its recent “Smarter regulation to grow the economy” policy paper that it will limit the length of non-compete clauses in employment contracts to 3 months. The concern driver for the reform is that the UK government considers that non-compete agreements can stifle technical innovation by restricting the mobility of highly trained professionals and the flow of information across industries. 

Relevance for the tech sector

In its consultation the UK government referenced the successful growth of tech companies in Silicon Valley, noting that non-compete restrictions are unenforceable in California. 

The UK government estimates that there are around 5 million employees subject to non-compete clauses in Great Britain, and that a typical duration is 6 months. This reform is of particular relevance to the tech sector which has innovation at its core, and where non-compete clauses of 6 months up to a year are prevalent amongst the established players. 

Non-compete restrictions are also a focus in the US at present, with the FTC’s consultation on its proposal to introduce a ban gathering 27,000 responses.

A boost to tech professionals and start-up culture

This limitation will provide to a boost to tech sector professionals by giving them the flexibility to join a competitor or start a rival business, immediately following departure from their employer. Departing employees can be well positioned to launch innovative ventures and to seek entrepreneurial opportunities overlooked by their previous employers.

In turn, start-ups and innovators should have access to a more a more mobile workforce. This should support greater competition in the sector, as per the example of Silicon Valley where IT businesses proliferate.

Recruiting and retaining tech talent

Meanwhile established tech sector employers will be focused on how best to protect their business interests if longer non-competes are no longer enforceable. 

Employers will still be able to rely on other restraints of trade including non-solicitation clauses, confidentiality clauses and garden leave. However they should begin considering how they can best protect their business once the reforms bite. Tech firms may need to reconsider their strategies for recruiting and retaining tech talent in an increasingly competitive market (for example through workplace improvements and increased compensation and incentives). 

Such strategies may well be used in tandem with strengthened contractual clauses, such as longer periods of notice and garden leave, heavier reliance on other restrictions such as non-dealing, non-solicitation and non-poaching, and a more forensic approach to confidentiality clauses.

Impact on M&A strategy

M&A strategy may also be impacted in terms of an impact on acqui-hiring. In an industry where top tech talent can out pace supply, this practice of buying out a smaller competitor to take on its talent pool has been prevalent. A limitation on non-competes could make acqui-hires less valuable precisely because acqui-hiring - which can be a more expensive option than taking on the work force of a start-up contractually - has the advantage of avoiding triggering non-competes. 

And, according to Harvard Business School research, if acqui-hiring becomes a less attractive option, this could negatively impact early stage funding by increasing risk for venture capital firms who rely on acqui-hires to take out underperforming investments.

Consolidation may also be encouraged given that tech companies often use non-competes to protect highly valuable intellectual property. If employees can more easily move to another company, an alternative option to protecting IP may be to acquire the new employer outright.

Further resources

Read more in our longer blog post Non-competes – a Transatlantic transfer of ideas to improve labour market mobility? | LinkingCompetition. You can also find out more about restraint of trade on our dedicated webpage: Team moves: Poached and Poacher | Linklaters. If you would like to speak to a member of our Employment & Incentives team, please do get in touch.