Consultancies vulnerable as government plots non-compete axe

Government proposals to scrap non-compete clauses may have ‘significant implications’ for the wider professional services sector. In the Budget, John Healey confirmed that the government is introducing legislation to reform non-compete clauses in employment contracts across the economy, in a bid to lubricate the labour marker for startups and scaling firms. The government will publish the details of the legislation early next year. Ministers have said it will focus on ‘workers’, meaning ‘equity partners’ are unlikely to be part of this overhaul.

But for the professional services sector, “high-ranking senior associates and some salaried partners whose relationship with their firm will typically be governed by an employment contract” could be caught in the changes, explained Pooja Dasgupta, senior associate, Farrer & Co. The professional services sector relies heavily on senior individuals with strong client connections. Abigail Fisher, chief people officer at Grant Thornton UK, said: “The professional services sector is ultimately built on the strength of its people, relationships and expertise.”

Non-competes increasinlgy common in consultancy Non-competes are clauses in an employment contract that legally restrict people from working for a direct rival or setting up a competing practice for a set period after leaving. Essentially they are used to prevent client relationships from walking out of the door of the firm. Firms in the professional services sector take these clauses seriously. City AM understands that the Big Four firms and other firms have tightened non-competes in recent years, with some clauses reportedly running for up to two years.

James Ransome, partner at Patrick Morgan, said: “If those restrictions are removed or reduced, I would expect greater movement between firms.” Ransome added that it could have “significant implications” for the Big Four giants, as challenger consultancies could benefit from moving over senior talent. Some firms have started to dilute equity pools to protect partner profits during the sector slowdown, including KPMG, which demoted senior equity partners in April and swapped them into salaried partner roles.

However, this side of the industry differs from the legal sector, as Nick Woolf, partner at Woolf&Co, explained: “most [legal] partners are LLP members, whose restrictions are typically contained in partnership agreements”, and therefore these clauses don’t have any effect. Gardening leave to the rescue Despite this proposal, City lawyers have already been 10 steps ahead with alternatives, including firms leaning more on gardening leave instead.

Gardening leave is a contract clause that outlines the period when an employee stays on the payroll during their notice period after resigning or being dismissed, but is instructed to stay away from the workplace and not perform any duties. Ransome added that “deferred cash compensation, unit allocations, profit-sharing arrangements and other financial incentives can be equally powerful in retaining talent”. He added that “for partners who are several years into their tenure, the prospect of walking away from significant unvested financial benefits can be a greater deterrent than the non-compete itself.”