Non-competes and employee competition: How should insurance businesses respond to future reform?
Anna Birtwistle, partner at Farrer & Co, examines how changes to non-compete covenants could be significant for the (re)insurance industry.
In an industry where non-competes of six to 12 months are standard fare and moves by front-facing staff to join competitors have the potential to cause significant loss of business, the news that non-compete covenants will be limited to three months is, as far as employment law is concerned, big news for the insurance world.
What is the government proposing?
At the moment we only have the basics, which in summary set out:
- The three-month limit will only apply to non-compete clauses in contracts of employment and limb (b) worker contracts (so-called ‘dependent contractors’). Non-competes in wider workplace contracts, such as equity arrangements, partnerships / LLP agreements or shareholder agreements, will not be affected
- The change will not affect or limit the use of non-solicitation clauses (which prevent employees from contacting previous customers or clients in an attempt to win their business) or non-dealing covenants (clauses which prevent employees from dealing with previous customers, even when that customer has proactively and of its own volition approached that employee)
- Common law principles about enforceability (see below on the current position) will continue to apply to non-compete clauses of no more than three months
- Government guidance on non-compete clauses will be published, though there is no indication as to when
Does it mean HR and legal teams should be putting a pen through longer non-competes in broker contracts now? Not so fast.
You see, while the government’s announcement to interfere in this area of employment relationships – developed over hundreds of years of case law – may be unprecedented, it has been wholly non-committal on timing. “When parliamentary time allows,” says the government. Underwhelming stuff, you may say.
The good news for insurance businesses then is that six- and 12-month non-compete restrictions do not look to be disappearing anytime soon. And for brokers or other executives subject to longer non-competes, while you may not see your contracts change in the immediate term, the government’s announcement may still provide you with negotiating leverage to reduce the length of your non-compete on exit, and certainly to push back on signing up to a 12-month non-compete with a new employer.
With change to non-competes on the horizon, what should insurance businesses be doing now?
As with many ‘people’ and ‘relationship’ businesses, insurance sector employment contracts often contain a suite of post-termination restrictions. Typically, these will include non-poaching of clients and staff, in addition to a straight non-compete obligation. Surprisingly, however, given the prevalence with which employers wish to rely on those provisions against key departing employees, as lawyers we are often dusting the metaphoric cobwebs off contracts which were put in place years earlier when an employee joined the business and haven’t seen the light of day since. Unfortunately, that can leave businesses in a vulnerable position when it comes to enforcement as their non-competes and other restrictive covenants are not fit for purpose, or do not reflect the business as it stands today or the role that is undertaken by the employee.
As a starting point then, review the drafting of your non-competes to ensure that what you have in place would in fact be enforceable. In other words, can you demonstrate that your covenant goes no further than reasonably necessary to protect your business interests? Does your definition of ‘competitor/competing business’ work? Can you justify the length and breadth of the non-compete by reference to the shelf life of your confidential information, the extent of client contact and longevity of client connections?
Outside of the contracts themselves, are you doing enough from a practical perspective to protect your confidential information (and in turn, thereby evidence to a court why the contractual protections are indeed necessary). In this regard, given the ‘lifeblood’ of companies operating in the insurance sector will commonly focus around client and intermediary relationships, details of pricing structures, contractual terms and renewal dates, it is important that this information, including that stored on CRM systems, isn’t made open to all – make use of differing access rights!
Aside from your non-compete, review your other protections (non-solicitation and non-dealing provisions) to ensure that they cover potential threats on the departure of a key employee. We commonly see insurance companies failing to protect their broker relationships. For example, are brokers covered within your ‘customer’ or ‘supplier’ definitions and therefore covered by non-solicitation and non-dealing clauses, or are your contracts silent, leaving brokers, being key business intermediaries, potentially at risk of falling through the cracks?
Finally, outside of the provisions which apply after termination of the employment, give thought now to what powers you need to adequately protect the business during the life of the employment. Do you have positive contractual obligations in place requiring employees to notify you when they accept a new role? Are your notice periods long enough and do you have the contractual right to place employees on garden leave? In a future world where non-competes will be for no longer than three months, garden leave will become the key method by which to keep employees out of the market. In the future, the norm of offsetting garden leave from the non-compete period may (unless the government prescribes differently) become a thing of the past.