UK: Protecting Your Business: Restrictive Covenants

Last Updated: 17 August 2011
Article by Vanessa Hempstead

It has been said that business is about people and their relationships, and that is certainly true of the insurance workplace. The majority of insurance companies and brokers invest considerable time and money in building relationships with clients, brokers and suppliers. Unfortunately, it is often the case that when an employee leaves for a competitor, they will endeavour to use those established relationships and information gathered to try to take those clients with them. Furthermore, given the recent economic downturn, there is the temptation for competitors to obtain client contacts and their business by poaching a rival team.

Those in the insurance sector will be familiar with the concept of restrictive covenants in employment contracts. Restrictive covenants are an important consideration for inclusion in employment contracts, particularly for senior employees or those whose knowledge and contacts could damage the business if they leave employment. English law generally considers that with employment contracts there is unequal bargaining power, and the courts are therefore prepared to interfere with generally, vary, reinterpret or refuse to uphold certain aspects of employment contracts, such as restrictive covenants.

Types of Restrictive Covenants and why have them?

In the event that they are no restrictive covenants in an employment contract, there is the risk that a former employee may work in a competing area, entice clients and contacts as well as poach employees. In the absence of restrictive covenants, if there is a garden leave clause in the contract of employment the employer can require the employee to spend all or part of their notice period at home. During a period of garden leave, the employee will be entitled to receive salary and benefits. Such clauses are useful for employers as they create a time during which the employee will not have contact with clients and colleagues or have access to confidential information, thereby reducing the risk of the employee damaging the employer when finally leaving. Garden leave clauses must be expressly agreed in the contract and are also subject to the test of reasonableness, but they provide limited protection.

So as to avoid any uncertainty when an employment contract ends, it is best to ensure that the contract contains certain restrictive covenants to protect the employer's business. For maximum protection, it is advisable to have an express garden leave clause in the contract as well as restrictive covenants.

There are many types of restrictive covenant, but the most commonly used are:

  • Non-competition: Restricting the employee from working for a competitor;
  • Non-solicitation of clients or potential clients: Restricting the employee from approaching or seeking business from clients or potential clients of the company's business;
  • Non-dealing with clients or potential clients: restricting the employee from dealing with clients or potential clients even if they approach the employee;
  • Non-poaching of employees: this prevents the employee from recruiting other employees from the company's business.

Further, the employment contract should also have carefully drafted confidentiality obligations on the employee, to prevent the employee from misusing confidential information of the business or its client and contacts.

Enforceability of Restrictive Covenants

It is important to ensure that the restrictive covenants in the employment contract are enforceable, otherwise they will not offer the desired protection. Therefore, restrictive covenants need to be drafted carefully and with the specific legitimate proprietary interests of the business that the company needs to protect in mind. On public policy grounds, Courts will only uphold restrictive covenants which are no wider than is reasonably required to protect the legitimate business interest of the employer.

Therefore, the drafting of the restrictive covenant is crucial. The Courts take the view that they are a restriction on the individual and so it is important that a company drafts the restrictive covenants appropriately taking into consideration the employee's role and seniority. "One-size-fits-all" covenants are the most likely to be found to be unenforceable by the Courts. The covenants will also need to carefully define who competitors, clients and employees are, as inadvertently wide definitions can undermine the whole covenant.

Traditionally, non-compete covenants have been viewed as difficult to enforce, since they are generally considered wider than necessary to protect the employer's interests. However, a recent trend in case law has developed where the Court upholds non-compete covenants based on a number of themes, which prudent employers should be looking to include in their contracts. For example, the longer the covenant the less likely it will be enforceable and that applies to all types of restrictive covenants.

Enforcement of breach of restrictive covenants

In the event an employer obtains evidence that an employee has acted in breach of their covenants (for example, in the event a client confirms they have been contacted), then the employer can consider a pre-emptive and decisive measure to threaten the former employee and seek an injunction to prevent further breach and/or damages. In certain circumstances, the new employer can also be brought into proceedings for inducing the individual to breach their contract. However, this is a notoriously difficult claim to prove.

Irrespective of the type of claim, however, it is imperative that the employer acts swiftly when it suspects a breach. This is especially pertinent if the employer wishes to obtain an injunction.


Often the most practical value of restrictive covenants is in their ability to deter an employee from using confidential information, or seeking to poach clients or employees. Given the competitiveness in the insurance market and the need to protect clients and business contacts, for all those senior employees or employees with a client-facing role, restrictive covenants are a necessity to protect the business from poachers. However, restrictive covenant clauses in contracts need to be drafted carefully to ensure that they will be upheld in the event of a breach.

The contents of this article are intended as guidelines for clients and other readers. It is not a substitute for considered advice on specific issues. Consequently, we cannot accept any responsibility for this information or for any errors or omissions.

Thomas Eggar LLP is a limited liability partnership registered in England and Wales under registered number OC326278 whose registered office is at The Corn Exchange, Baffin's Lane, Chichester, West Sussex, PO19 1GE (VAT number 991259583). The word 'partner' refers to a member of the LLP, or an employee or consultant with equivalent standing and qualifications. A list of the members of the LLP is displayed at the above address, together with a list of those non-members who are designated as partners. Regulated by the Solicitors Regulation Authority. Lexcel and Investors in People accredited.

Thomas Eggar LLP is not authorised by the Financial Services Authority. However, we are included on the register maintained by the Financial Services Authority so that we can carry on insurance mediation activity which is broadly the advising on, selling and administering of insurance contracts. This part of our business, including arrangements for complaints and redress if something goes wrong, is regulated by the Solicitors Regulation Authority. The register can be accessed via the Financial Services Authority website. We can also provide certain further limited investment services to clients if those services are incidental to the professional services we have been engaged to provide as solicitors.

Thesis Asset Management plc, our associated financial services company, provides a comprehensive range of investment services and advice. Thesis is owned by members of Thomas Eggar LLP but is independent of and separate to it. No lawyer connected with Thomas Eggar LLP provides services through Thesis as a practicing lawyer regulated by the Solicitors Regulation Authority. Thesis is authorised and regulated by the Financial Services Authority. Thesis has its own framework of investor protection and professional indemnity cover but Thesis clients do not enjoy the statutory protection of solicitors' clients.

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