The last thing an employer needs in the current economic climate is to lose employees to a competitor and for them then to take key clients, suppliers, employees or confidential information with them. Now is therefore a good time for employers to ensure they have the right contractual protection in place, in the form of tightlydrafted restrictive covenants and confidentiality clauses, and express garden leave clauses.
There have been a number of cases recently that underline the importance of having express provisions in a contract, if only to avoid the cost of expensive legal proceedings which could probably have been avoided if the employee’s obligations had been set out sufficiently clearly in the first place.
In SG&R Valuation Service Co v Boudrais & ors the High Court said that employers may place employees on garden leave even in the absence of an express contractual right to do so, but only if there is clear evidence of actual (as opposed to feared or anticipated) wrongdoing on the part of the employee.
In Boudrais two senior employees, B and S, resigned to go and work for a competitor. Almost immediately afterwards SG&R discovered emails showing that the two had been planning their departure for a while and had been helping themselves to confidential information as well as details of potential business opportunities. Some of the emails were even cheekily entitled “Project Chaos”. [Note to prospective leavers – Courts tend to take jokes at the expense of the victim employer less than charitably!]. SG&R therefore asked them to stay at home, in effect to take garden leave. The employees responded by resigning with immediate effect. They argued that in the absence of an express garden leave clause SG&R had no right to place them on garden leave and so its actions constituted a fundamental breach of contract entitling them to resign. Deeply concerned about the impact their immediate departure could have on its business, SG&R applied to the High Court for an interim injunction to stop B and S joining its competitor for the balance of their three months’ notice periods.
In line with previous case law in this area, the Judge approached this issue by asking himself whether B and S had the right to work. Whether an employee has such a right depends largely on how far he needs to keep working in order to preserve his skills and future employment prospects. The Judge held that B and S had a right to work because they had specialist skills and any removal from the market for a substantial period would result in their skills going stale. Furthermore a substantial part of their remuneration was by way of a bonus, and their inability to work during their notice period would seriously affect their earning capacity for that period. Fortunately for SG&R that was not the end of the story. The Judge went on to say, however, that the right to work is not an unqualified right. Employees have this right subject to their not acting in such a way as to render it impracticable for the employer to provide work. B and S had clearly demonstrated they were not ready and willing to work for SG&R. They had after all deliberately set out to take clients and staff away with them and were clearly intent on doing as much damage as possible to its business. It would have been impossible to provide them with any meaningful work in those circumstances. As such SG&R was entitled to place them on garden leave for the balance of their notice period.
This case shows that all is not necessarily lost if an employee walks out intent on doing harm to his former employer’s business. In order to succeed, however, an employer will have to demonstrate clear evidence of wrongdoing on the part of the employee, and this is not always straightforward. Not all employees are foolish or arrogant enough to leave such a clear and traceable paper (or rather email) trail as B and S did. This means that if they are senior, have specialised skills and/or may qualify to earn a significant bonus during the bonus period it might be difficult to exclude them from the workplace.
But why run the risk of having to do this in the first place? Much better to include an express garden leave clause in the employee’s contract. The advantage of a garden leave clause over a restrictive covenant is that the employee remains employed and is therefore bound by both the implied and express terms of his contract.
In addition, the Courts will cut down an overlong period of garden leave to match the risk being defended against, whereas an overlong covenant will be void in its entirety. The main disadvantage is the cost to the employer, in that it will be required to continue to pay him his salary and benefits during his notice period, though any right to bonus or commissions can usually be excluded by contract for that period.
Any such clause should make it clear that the employer has the express right to exclude the employee from its premises and withdraw duties as well as setting out any rights and obligations during the garden leave period. It is also advisable to require the employee to take any accrued but unused holiday during this period. If the employee is also a director of the company, an employer should consider including an express power requiring him to resign from office in the event he is put on garden leave. This is because unless the contract contains such a provision, the company cannot prevent the employee from turning up to board meetings and requesting copies of board minutes.
In Crowson Fabrics Ltd v Rider & ors last year the High Court highlighted the importance of employers clearly defining in their contracts of employment what they consider to be confidential information. A failure to do so could mean that they are subsequently unable to stop employees from using it post-termination. In this case the employer was actually able to prevent the departing employees from using its information even without such a clause because they had obtained it illegitimately. More interestingly Crowson also argued that the employees in question had infringed its database rights by extracting information from its computer system about customer names and sales figures. It was therefore able to use intellectual property law to protect its position. This may be an avenue that employers wish to explore in cases where there are no express restrictive covenants or terms relating to the use of confidential information.
Finally, in Duarte v Black and Decker Corp earlier this year the High Court decided that restrictive covenants contained in a share incentive scheme governed by foreign law could not be enforced in the UK, even if they would be valid under the relevant foreign law. Multi-national employers with employees working in the UK subject to contracts governed by foreign law need therefore to ensure that any covenants are valid in the UK as well as abroad. One might imagine that the converse would also be true, so UK employers sending key staff overseas could sensibly take local law advice as to the enforceability of their anti-competition measures in the destination country.
Employers that do not currently have tightly-drafted contracts in place might even want to try and use the current economic climate to their advantage. Now might be a good time to seek to make changes to employees’ terms and conditions, as they may be more willing to agree to changes (even less favourable ones!).