Non-Compete Reform May Loosen Hold of UK Consulting Firms
Consultancies guard their client relationships closely. A planned change to non-compete clauses in the UK could test how well they can keep senior people from leaving with those clients.
What the Budget set in motion
John Healey confirmed in the Budget that the government will bring in legislation that changes how non-compete terms apply in employment contracts throughout the economy. The stated aim is to make the labour market easier for startups and scaling firms to work in. Details are due early next year.
A non-compete stops a departing employee from moving to a direct competitor or starting a rival practice for a fixed time. Firms use it so that client relationships stay put when the person goes.
Who could be caught
Ministers have said the reform will focus on "workers". That suggests equity partners are unlikely to be covered. Pooja Dasgupta, a senior associate at Farrer & Co, noted that high-ranking senior associates and some salaried partners are governed by an employment contract. They could be caught by the changes.
Law firms look different. Nick Woolf, a partner at Woolf&Co, said most legal partners are members of limited liability partnerships. Their restrictions usually sit in partnership agreements, so the clauses would not be affected.
Tighter clauses, possible movement
City AM understands that the Big Four and other firms have tightened their non-competes in recent years. Some clauses reportedly run for up to two years.
James Ransome, a partner at Patrick Morgan, said that if the restrictions are removed or reduced he would expect "greater movement between firms". He said challenger consultancies could benefit by attracting senior talent from the larger players.
Abigail Fisher, chief people officer at Grant Thornton UK, said the sector rests on what its people know and the relationships they hold.
As the sector slows, some firms are diluting equity pools, a step meant to shield partner profits. KPMG demoted senior equity partners in April and moved them into salaried partner roles.
Ways firms may hold on to people
City lawyers are already preparing alternatives. One is gardening leave: during the notice period after resignation or dismissal the employee keeps drawing a salary but does not come to work or do any work.
Ransome said deferred cash pay, unit allocations and profit-sharing can be just as effective at retaining talent. For a partner several years into the job, he said, walking away from large unvested financial benefits can deter more than the non-compete does.
Our view
The reform's reach depends on wording that does not yet exist. The key question is where the law draws the line between "workers" and partners. Salaried partners sit on that line, and the early-next-year draft will show which side they land on. If clauses weaken, firms may shift weight to pay structures that are harder to walk away from.
Source: City AM