Government announces plans to reform employment law

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On 10 May 2023 the government published plans to: limit the length of non-compete clauses to three months; amend the holiday provisions in the Working Time Regulations 1998; and consult on changes to the information and consultation obligations in relation to TUPE.

Non-compete cap

Non-compete clauses will commonly be included in employment contracts to prevent an employee from joining or establishing a competing business after they have left employment. The employer is currently free to decide the duration of the restriction, but this is subject to the principle that any restriction which goes beyond that which is reasonably necessary to protect the employer’s legitimate business interests will be void as contrary to public policy and in restraint of trade. A period of six to 12 months is usually adopted in practice.

The proposed statutory reforms mean that, in future, all non-compete clauses will be limited to a maximum of three months. The government estimates that up to five million UK workers are currently subject to non-compete restrictions. It therefore intends for the reforms to provide these individuals with greater freedoms to switch jobs and for employers to have greater opportunity to grow their businesses by allowing them to recruit candidates with valuable experience.

The implementation date for any new legislation is not known as it will be brought in only when parliamentary time allows.

What is likely is that, in the immediate future, there will be more focus on other types of restrictions in readiness for the changes being implemented.

While non-compete clauses will be limited to just three months, there would normally be other restrictions in the contract of employment that prevent an employee from soliciting or dealing with previous customers or clients on leaving. These are not impacted by the proposals.

In addition, the law relating to express and implied restrictions on former employees making use of confidential information is unaffected.

Holiday pay reforms

Important changes will also be made to the Working Time Regulations 1998 (WTR), which will impact on holiday pay arrangements.

The government will pass regulations that will allow employers to use rolled up holiday pay. This is currently unlawful following EU case law that suggested payments should be made at the time when the leave was taken, or workers might not use their full leave entitlement. However, it was accepted that any payments identified as being made in respect of holiday under a transparent and clear arrangement would still be taken into account when calculating whether any monies were due.

The planned change will make it easier for employers to operate pay roll, particularly in respect of casual workers with no set hours of work.

This change will also fit in with the recent government proposals regarding the calculation of holiday pay for part year and irregular workers. The consultation on those changes, which suggested that holiday entitlement should be calculated on a pro-rata basis, closed on 9 March 2023.

Holiday entitlements under the WTR are also intended to be merged. Under the WTR, there are currently different rules relating to the four weeks’ holiday derived from EU law and the extra 1.6 weeks’ holiday that the government introduced to reflect the usual eight public holidays each year.

Treating all the leave entitlement in the way same way should simplify holiday pay arrangements, which can currently lead to the four weeks of holiday pay being calculated in a different way to the remainder of the holiday entitlement.

It also provides the opportunity to simplify the rules in relation to issues, such as whether and how much leave one can carry over from one year to the next when illness or other reasons have prevented an individual taking it. The WTR’s original provision that annual leave was subject to a ‘use it or lose it’ rule had, over time, become subject to several exceptions that reflected EU case law applying protection to the four weeks’ entitlement. The new Regulations will need to clarify whether those protections will remain or be extended to the full 5.6 weeks’ entitlement.

Lastly, the government states that the requirement that employers keep records of working hours to ensure compliance with maximum weekly working time will be removed. This will, however, not impact the practical importance of having records in place showing what hours have been worked for the purposes of complying with other regulations and contractual obligations, including entitlement to national minimum wage.

TUPE consultation reform

The government will also start consulting on proposals to introduce more flexibility in relation to the information and consultation obligations that are triggered under TUPE.

TUPE requires employers to inform and, where measures are envisaged, consult appropriate representatives of affected employees prior to a transfer.

Where no union is recognised and there are no existing employee representatives, the employer will have to arrange for the employees to elect representatives.

There is currently an exception that allows employers with fewer than 10 employees to inform and consult directly with the affected employees.

The government is proposing to extend this exception by allowing employers with fewer than 50 employees and transfers affecting less than 10 employees to consult directly with the affected employees.

The wording used in the announcement fails to make it clear whether the proposed change will impact all businesses with fewer than 50 employees and all transfers that affect less than 10 employees, or whether both conditions must be satisfied before the exception will apply. This will be clarified when consultation on the proposed changes is published.

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