Government seeks input on proposed changes to Working Time Regulations, TUPE and non-competition clauses (Part 2)

Proposals include changes to holiday leave and pay administration and collective consultation requirements.

On 10 May the Department for Business and Trade (DBT) announced an ‘initial package of regulatory reform’ to reduce what it labelled unnecessary regulation for businesses with the aim of cutting costs and allowing those businesses to compete.

The announcement highlighted DBT’s policy paper Smarter Regulation to Grow the Economy which set out three areas for reform in the Working Time Regulations 1998 (WTR), the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) and in respect of an intention to introduce legislation to limit non-compete clauses to no more than three months’ post-termination to allow employees more flexibility to join competitors or start up a rival business having left their position.

Consultation launched

On 12 May, DBT launched a consultation on the proposals to amend the WTR and TUPE, alongside a more expansive paper setting out the proposed changes and seeking feedback from businesses and workers. Separately, DBT published its response paper to the 2020 consultation on measures to reform post-termination non-compete clauses.

Part 1 of this article looked at the proposed changes to the WTR, and this article focusses on proposed changes to TUPE and non-compete clauses.

TUPE reform

The consultation paper sets out the proposal to amend the need for employers to consult with employee representatives in certain circumstances where there are not already representatives in place.

As highlighted in the paper, businesses with fewer than 10 employees are not required to consult with representatives and can consult with the employees directly. Businesses with 10 or more employees are required to arrange elections for employee representatives if none are in place when the need for consultation arises, even if the proposal is only for fewer than 10 employees to transfer via TUPE.

The proposal from DBT is to extend the freedom afforded to microbusinesses not to consult with representatives to small businesses of no more than 49 employees, as long as there are no elected representatives already in place at the time of the consultation, and for businesses of all sizes to consult directly with staff where a transfer affects fewer than 10 employees.

The paper does not set out any consideration of the effect of these changes and in line with the proposed changes to the WTR, seeks to downplay the impact that these might have on affected employees or employers. For example, no consideration of the reasoning behind the requirement to consult representatives is given (e.g. to help redress the imbalance of power between the parties when discussing any proposed measures and the legal economic and social implications of the transfer) nor does it consider that consulting representatives may help employers to streamline their consultation process and with workers ‘knowing understanding and using’ their rights in such circumstances, which DBT claims is an issue with TUPE.

Non-compete clauses

In 2020 the government published a consultation on three options being considered to refresh post-employment non-compete restrictions in the UK with a view to aiding competition and innovation. Those options were as follows:

Option 1: make post-termination non-compete clauses in employment contracts permissible as long as compensation was provided for the period of restraint (using the logic that this would force employers to consider how they used such restrictions); or

Option 2: make all non-compete restrictions void and unenforceable (on the basis this would spur innovation modelled, in effect, on copying the law in places like California, which has a world-leading tech sector).

More than two years later, the government announced its response to the consultation on 12 May 2023 (also available at the link above). Despite most respondents showing support for option 1, the government concluded that it would not utilise it as it would impose a ‘substantial direct cost to business […] at a critical junction in our economic recovery’ and it could lead to unintended consequences such as loss of investor confidence and a reduction in the need to train employees.

Instead, the government has put forward a third option, which will see new legislation brought in to cap post-employment non-compete clauses to three months. This was announced in the Smarter Regulation to Grow the Economy paper, linked above.

Whilst this option was not set out independently, it was included as a sub-option to Option 1 in the consultation paper. Per the response, 60% of respondents were in favour of limiting non-compete clauses, but reducing this to three months was the least popular option.

It is important to note that this proposal does not affect ‘non-solicitation’, ‘non-dealing’ and ‘non-poaching’ clauses designed to protect an employer against a departing employee using their knowledge of the business to target the employers’ clients, suppliers and staff. It has also been clarified that the changes will only apply to employee and worker contracts and will not affect other types of contract such as LLP and partnership agreements or sale and purchase agreements.

Comment

The consultation paper on proposed WTR and TUPE reforms presents these proposed changes as part of DBT’s process of identifying opportunities to reduce bureaucracy and regulation and to ensure these areas are ‘fit for purpose for both businesses and workers alike’ as part of the Government’s wider growth agenda. 

The proposals are likely to be attractive to some employers on the basis that they seek to simplify areas of considerable business administrational burden and reduce the time, and therefore cost, required to comply with the relevant regulations. The paper is keen to stress that no workers’ rights are being lost in the proposals, but critics will likely point to the weakening effect of the proposals on current employment protections and particularly on the structures that help worker to understand and enforce their rights.

The consultation closes on 7 July 2023 and it remains to be seen to what extent the government will seek to address the apparent imbalance of the effect of the proposals made.

The announcement on non-compete clauses is likely to see a mixed response from employers. Intriguingly, as some legal commentators have highlighted, the limiting of non-compete clauses for employment and worker contracts opens up the possibility that employers and employees may agree to longer-term restrictions as part of a settlement agreement, which will presumably see an employee being paid additional sums of money to secure them. In this way, elements of Option 1 as originally set out in the consultation may come into practice.

The limit on non-compete clauses will require primary legislation and it remains unclear how long it will take for the government to table it. With a general election likely in 2024, there may be further reconsideration of this proposal.