On 10 May 2023, the Department for Business and Trade published Smarter Regulation to Grow the Economy, the first in what is intended to be a series of regulatory reform announcements.
The policy measures outlined are one of the UK Government’s intended ways of capitalising on the regulatory space created by the UK’s decoupling from the EU, to drive economic growth.
The proposals include:
- The amalgamation of the separate legal concepts of what we’ve come to call Euro Leave - four weeks’ holiday under the EU Working Time Directive - and Additional UK Leave - the extra 1.6 weeks’ leave afforded under the Working Time Regulations. The overall statutory leave entitlement will remain the same, but the government is inviting views on the best method of calculation of holiday pay. While the ambition is to reduce hassle whilst maintaining standards, alternatives methods of calculation that result in businesses paying more, or workers receiving less, could well be contentious.
- The removal of the requirement for employers to keep written records of daily working time for the purposes of demonstrating compliance with the Working Time Regulations. The impact of this change may be muted, however, by the continued obligation to record working time under national minimum wage legislation.
- Allowing the currently unlawful approach of 'rolled up' holiday pay, which would effectively allow employers to pay in lieu of accrued holidays where their workers work irregular hours. This simplification is likely to be a most welcome change in sectors where casual working arrangements are predominant.
- The simplification of TUPE regulations with the extension of the current micro-business exemption from employee representative consultation obligations to include businesses with fewer than 50 employees. This is coupled with proposals for any size of organisation be able to consult directly with employees as long as they don’t have existing employee representatives in place and fewer than 10 employees are affected by a TUPE transfer.
- New restrictions on post-termination non-compete provisions. As there is currently no legislative framework regulating restrictive covenants, it is open to employers to decide on the scope and duration of non-compete clauses. In response, Courts have limited employers with tests on what is reasonable to enforce in each situation. The proposal is to cap the length of non-compete clauses to a maximum of three months after termination: a significant shortening on the period often used in many senior employees’ contracts.
The government is clear that this change will not interfere with other restrictive covenants in employment contracts including the ability for employers to utilise paid notice periods, gardening leave, non-solicitation clauses and confidentiality provisions.
The difficulty in policing non-solicitation and non-dealing clauses may, however, force employers to rely more heavily on garden leave, which is not only more expensive, but removes the individual from the labour market completely - at odds with the policy intentions.
Further, the wording of the announcement strongly suggests changes will be focused on the employment context and are unlikely to also be extended to the commercial context whether in a business transfer, share purchase, or partnership agreement.
Ultimately, these proposals mark only the government’s future direction.
No changes have passed as legislation or come into force. No timescales have been committed to, and there remains significant potential for other competing political priorities to consume the government’s time.
Furthermore, a general election next year could lead to a new government with new policies. It is also possible that the proposals could change significantly as a result of responses to the consultation the government launched on 15 May on Retained EU Employment Law and, indeed, as a result of further developments in case law.
On a practical level, businesses don’t need to change any policies or alert staff to any changes at the moment.
That said, a number of businesses are thinking proactively about their restrictive covenants for key employees, and whether going forward, they may wish to rely more heavily on other contractual restrictions which are unaffected by these proposals, like garden leave and non- dealing/non-solicitation clauses.
It is likely that these will become of critical importance and litigated over more heavily if these changes to non-competes are implemented.
It is not clear yet whether those employees currently bound by existing covenants would have their non-competes reduced to three months’ duration, or alternatively whether the legislation will not act retrospectively.
From a political perspective, this seems less likely.
In a deal context, the notice, garden leave and post-termination restriction clauses of senior management and executive directors will be scrutinised even more closely as part of due diligence exercises on acquisition and investment, with consideration being given to appropriate protections being put in place at completion or post-completion.
Jennifer Skeoch is a partner and Ross Gale is a trainee solicitor at Burness Paull
