UK non-compete reforms—the talent war and insurers
The insurance industry has long relied on non-compete clauses to protect its business interests. These clauses, often lasting six to 12 months, aim to prevent employees joining competitors, taking business with them, and potentially causing significant losses for their former employer.
However, an announcement from the UK government in May regarding the reform of non-compete covenants, most notably putting in place a statutory limit on length of non-competes to three months, has raised questions about how insurance businesses should adapt to these changes.
Although nothing is set in stone, the government intends to legislate on the issue when parliamentary time allows, having last consulted on the possibility of reform as far back as December 2020, in an effort to boost the economy’s competitiveness by making the labour market more flexible. What are the implications of these proposals for the insurance industry, and how should insurance businesses respond?
Understanding the proposed reforms
The UK government’s proposals for non-compete clauses in employment contracts and “dependent contractor” agreements introduce significant changes to the current landscape and several key aspects that insurance businesses must consider.
As an overview, the reforms would introduce a maximum duration for non-compete clauses, capping them at a maximum of three months. This duration restriction specifically applies to contracts of employment and dependent contractor agreements. This contrasts with the current legal position that provides that restrictions should be for no longer than necessary to protect the legitimate interests of the business, with case law having determined that the maximum enforceable period in respect of any post-termination restriction (bar confidentiality obligations) is 12 months.
It is important to note that the proposed reform is not intended to impact non-solicitation or non-dealing covenants, in respect of which it remains open for employers to set longer durations, subject to the usual tests of enforceability. These provisions serve to prevent employees contacting previous customers or clients and in the insurance sector will typically be for 12 months.
A non-compete, in contrast, is aimed at preventing a departing employee working for a competitor at all for its duration, thereby giving employers certainty—without the need to police non-solicit and non-deal covenants—that their former employees do not pose any competitive threat to them for a period of time post-exit.
It’s worth noting that non-compete clauses in broader workplace contracts, such as equity arrangements, partnerships, LLP agreements, or shareholder agreements, would not be subject to the three-month limit.
Insurance businesses should keep track of developments on these proposals, as legislative reform may force a firm to adjust its practices.
Implications for insurance businesses
The proposed reforms have significant implications for insurance businesses, particularly those that heavily rely on non-compete clauses to safeguard their operations and client relationships.
Managing new hires with change on the horizon
While the proposals may limit the duration of non-compete clauses in the future, existing contracts and agreements remain unaffected in the immediate term. This notwithstanding, we expect that even before new law coming into force, change on the horizon will mean that the issue will become a live one in negotiations regarding the terms of non-competes in the contracts for new hires.
Insurance companies should be prepared for there to be pushback on the inclusion of long non-competes in contracts and consider now how the business will approach those discussions.
Agreeing to a non-compete for new hires that sits at three months in anticipation of the reforms, where peers with existing contracts are subject to 12 month non-compete obligations, is unlikely to be commercially palatable. That said, being prepared to discuss how the business will manage future legal change is vital.
