City firms brace for shift away from non‑compete clauses

London‑based companies are preparing for a likely curtailment of non‑compete clauses after the Department for Business and Trade closed a consultation on the issue in February. The review, launched in 2025, asked for views on limiting the enforceability of such clauses in employment contracts.

Legal experts say the outcome could force firms to replace traditional restraints with alternative incentives. David Palmer, a partner at Addleshaw Goddard, told City AM that the consultation signals “a change, and that might involve getting rid of them in some way, changing them, or making them ineffective.”

We don’t quite know what they will do…. I wouldn’t imagine that within two years’ time, we’ll still have them in the same way, shape, or form. It looks like there’s going to be change, and that might involve getting rid of them in some way, changing them, or making them ineffective.

Employers are already brainstorming “blue‑sky” solutions to keep talent. One idea is to postpone bonus payouts, effectively tying a portion of remuneration to continued employment. Another is to lean on garden‑leave clauses, which keep departing staff on the payroll while restricting their ability to join rivals. Palmer notes that garden leave “gives you the best protection because they owe you more duties while still your employee.”

How the new rights are reshaping contracts

From January, the revised Employment Rights Act reduces the probation window needed before an employee can claim unfair dismissal from twelve months to six months. Employers are shortening probation periods to identify mismatches early, aiming to exit staff before they acquire the right to bring a claim.

In parallel, the removal of the £123,543 (or one year’s salary) cap on unfair‑dismissal compensation means layoffs will become more expensive. Lawyers observed a spike in senior‑executive exits in July as firms accelerated redundancies before the cap vanished.

What comes next for City employers

With the legal landscape shifting, HR teams are expected to focus on performance metrics in the first few months of a role and to design remuneration packages that reward longevity without relying on restrictive covenants. Share‑incentive schemes that lock up equity for extended periods are already in use in some sectors, offering another lever to retain staff.

Businesses that adapt quickly may preserve talent and avoid litigation, while those that cling to traditional non‑competes could face unenforceable clauses and higher turnover. The broader business climate suggests that flexibility will be key to staying competitive in the post‑consultation era.

In short, the City’s employers are re‑engineering contracts today to sidestep tomorrow’s legal and financial risks.