Does the CMA’s January report on UK labour markets hint that we have something to learn from the early 1800s? Before the middle of the 19th century restrictive covenants in employment were rare – there were some non-competes in certain circumstances, but there was no clear legal basis for an employer to restrain an individual from working. According to the CMA’s Microeconomics Unit, that has all changed. Roughly 26% of employees consider themselves bound by a non-compete clause and this rises to nearly 40% in professional, scientific and information and communication technology circles.
The CMA’s report does not advocate any particular policy change – although it suggests that greater regulation of restrictive covenants would be welcome – but it makes for interesting reading at a time when the regulator is taking more of an interest in the labour markets generally. Indeed, in its most recent Annual Plan, the CMA has made the investigation of anti-competitive behaviour in labour markets a key priority, “particularly during a cost of living crisis”; and in further guidance published last year noted a specific intention “to boost business compliance and remind employers of their legal obligations to avoid collusion when it comes to employee pay, working conditions and the hiring of staff”. This follows the opening of two separate investigations in 2022 and 2023 into suspected anti-competitive conduct regarding the setting of pay rates and, within the last month, the widening of an existing cartel investigation to cover suspected unlawful no-poaching arrangements.
Commenting on the latest report in a recent speech, Sarah Cardell, Chief Executive of the CMA, noted that the developments set out in the report potentially give rise to new questions for competition authorities about how and when such activity is or should be caught by the competition rules.
Employers may be interested to note from the report that:
- General economic picture: The relative share of UK GDP received by employees as income (as opposed to being delivered up, for example, to shareholders as dividends) has remained fairly constant over the past 20 years, at 60%. Equivalent figures for the US show labour’s share of income declining. Likewise, wage “markdown” has slightly decreased in the UK, meaning that there is a smaller difference between the contribution a worker makes to their employer’s revenue and the wage they are paid. In the US there has been a marked increase in wage markdown.
- The impact of collective bargaining on pay: The pay for workers covered by collective bargaining agreements is less affected by labour market concentrations (broadly meaning that even in locations where the employer has the balance of power in setting pay, collective bargaining offsets this so that pay is not negatively impacted). That is relevant because of the recent rise in employees seeking union recognition, which we have examined in a series of recent ‘Effective Collective’ blogs (see more here).
- Hybrid working: The impact of hybrid working on pay is ambiguous, but it would appear that employees value the option to work remotely two to three days per week in monetary terms as up to 10% of salary (meaning they would expect to earn up to 10% more to work every day in the office). This may be useful when thinking about pay setting for remote working.
- Gig workers: Gig work through apps has increased, but it still represents a small minority of the workforce, at 5% (potentially up to 12% when wider definitions of casual work are included). The overall hourly rate of pay for gig workers is comparable to more traditional workers, but those in the gig economy often work multiple jobs as part of earning their income.
- Non-compete awareness: There is a significant minority of employees (23%) who are unsure if they are bound by a non-compete. Employers may wish to remind employees who are leaving of their post-termination obligations.
- Length of non-competes: This is fairly evenly spread between three to six months; longer than six months; or 12 months – meaning there is no one set length for a non-compete covenant. The UK government announced last year that it would legislate when time allowed to limit non-competes in employment to three months (see more in our blog post). Whilst the general mood amongst employment lawyers may have been that this particular policy would not end up on the statute books, the CMA’s focus on labour markets and non-competes may mean that the next government does in fact take it forward. The fact that according to the report the majority of non-competes seem to be at least three months or longer, we might expect any change in law to have a very significant impact on employers.
- Impact of non-competes on moving jobs: It is somewhat surprising that only 24% of employees with non-compete agreements said they are “to some extent” prevented from leaving their current employer to join a competitor. Perhaps this is because the length of the restriction would not ultimately prevent them from joining a competitor in the long term, or perhaps they have reason to believe their employer won’t take action to enforce the restriction at all (where certainty of outcome is unclear and legal costs can be off putting).
There is one somewhat concerning theme in the report, and some oversights:
- The report refers in a few places to non-disclosure agreements acting as a barrier or restriction on individuals moving jobs. The report suggests that only 13% of employers use confidentiality agreements in some employment contracts (which, entirely impressionistically, feels like an under-estimation of their use). Employers are likely to resist strongly any suggestion that confidentiality arrangements should be limited to enable employees to move jobs. There is a rather significant difference between an employee being able to take up work (even at a competitor), using skills and knowledge that they have developed, and that employee handing over confidential information on a competitor’s strategy, customers and revenues to their new employer. Employers may argue that this would stymie business investment and innovation.
- The CMA report focuses on restrictions in employment. Employees may of course be subject to restrictions under other agreements – for example, shareholders’ agreements if they hold equity as part of an incentive arrangement. The courts have generally accepted that greater restrictions can be placed on employees who enter into such restrictions in their capacity as a shareholder – even if equivalent restrictions would have been unreasonable in an employment contract. It is unclear to what extent the CMA may focus on this in the future.
- Employers have other tools at their disposal to mitigate the risk of employees damaging their business when they resign – for example, the use of long contractual notice periods and/or garden leave, during which time the employee remains bound by any express (and all implied) employment duties not to damage their employer. The CMA report does not refer to these tools, suggesting that they are currently under less scrutiny.
- Whilst the CMA report refers to other types of restriction (e.g. non-solicitation), it has far less data on their prevalence, duration or impact on employee mobility.
