Reform of EU law and restrictive covenants

On 10 May 2023, the Government published its policy paper “smarter regulation to grow the economy” and made a written statement to parliament, as part of a package of regulatory reforms to EU employment law and the law on non-compete restrictions.

The Government says that removing unnecessary red tape and regulatory burdens could save employers over £1 billion per year, while safeguarding the rights of workers. In this briefing, we look at the proposed measures.

Non-compete restrictions to be limited to 3 months

Non-compete clauses, a type of ‘restrictive covenant’ restricting an employee’s post-termination activities, prevent an ex-employee from working for a competitor of the employer for a period of time. Currently, they are enforceable only if they are ‘no wider than is reasonably necessary to protect the employer’s legitimate business interests’.

In the Government’s view, unnecessarily burdensome non-compete clauses have become the default, but it accepts the importance of the role such clauses play in protecting businesses. The Government has now confirmed that they will introduce a three-month statutory limit on the length of non-compete clauses.

Employers will be able to continue to use notice periods, garden leave, confidentiality clauses and non-solicitation clauses (and, while not expressly mentioned, presumably other types of restrictive covenants such as non-dealing and non-poaching clauses).

The Government intends to legislate when “parliamentary time allows”. As always, parliamentary time is congested, so it seems unlikely that reform will happen imminently, and may not be passed before the next General Election.

Retained EU Law (Revocation and Reform) Bill – abandoning the sunset clause

At the end of the Brexit transition period on 31 December 2020, EU derived laws that applied to the UK at that time were absorbed into the domestic legal framework. This body of law became known as ‘retained EU law’. Subsequently, the Government introduced the Retained EU Law (Revocation and Reform) Bill (the REUL Bill).

The current draft of the REUL Bill includes a ‘sunset clause’, automatically revoking all retained EU law at the end of 2023, unless a statutory instrument is passed to preserve it.

Kemi Badenoch, the Secretary of State for Business and Trade, has now made a statement to parliament, confirming the sunset clause is to be abandoned. As such, all retained EU law will remain part of UK law, unless expressly revoked by a list included within the REUL Bill. The current draft of the list does not contain any key employment legislation.

The REUL Bill will include powers to amend remaining retained EU laws, so that more complex regulations can still be revoked or reformed after proper assessment and consultation.

Simplifying TUPE consultation requirements for small businesses

The Government will consult on simplifying the consultation requirements imposed on employers under the Transfer of Undertakings (Protection of Employment) Regulations (TUPE).

Businesses are currently obliged to inform and (where appropriate) consult appropriate representatives of affected employees about a proposed TUPE transfer. There is an exemption to this where the employer has fewer than 10 employees and certain conditions apply – in which case, the employer can inform and consult affected employees direct. The Government is considering extending this exception to organisations with fewer than 50 employees in the business and fewer than 10 transferees.

There is no indication as to when this change will take place, but it is expected that it could be passed fairly quickly.

Working Time Regulations 1998

The Government is consulting on simplifying some aspects of the Working Time Regulations 1998 (the WTR). The Government’s proposals are as follows.

• Reintroduce the concept of ‘rolled-up’ holiday pay – allowing employers to pay an additional amount (representing holiday pay) on top of the normal hourly rate of pay, instead of the employee taking time off at the time the payment is received. Rolled-up holiday pay is currently prevented by EU case law.

• Merge holiday entitlements – the ‘basic’ 4 weeks’ leave (a retained EU law entitlement) and ‘additional’ 1.6 weeks’ leave (a domestic entitlement) will be merged into a single statutory annual leave regime.

• Remove requirement to keep working time records – the WTR currently require businesses to keep working hour records for workers.

The Government has stated it intends to make the reforms this year.

What next?

The Government has said this is a first in a series of regulatory reform announcements, which will likely comprise a fresh batch of announcements and, hopefully, clarification on the announcements above.

Employers should keep a watching brief on reform of non-compete clauses and audit its employment contracts as appropriate, once more is known about the scope and timetabling of this reform. We are not expecting any change in relation to non-compete clauses imminently, so this is likely just one to watch for now.

Employers should also track the consultations on retained EU law (including reform of the WTR and TUPE Regulations) (closing on 7 July 2023). The Government is likely to respond to each in the near future, given they intend to legislate on the proposed reforms this year.

Contributors: Sarah Maddock and Calum Ross

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