Further to our post last week about key employees leaving, employers may wonder about risks to their business and options for recourse if that key employee leaves and sets up a competing shop next door.
There are three main potential risks presented by a departing key employee:
- Misuse of employer confidential information
- Setting up a competing business
- Soliciting former employer customers
These are risks we try to mitigate for at the outset of the employment relationship with good contracts and restrictive covenant agreements. The end of the employment relationship is when the risks become live.
Misuse of confidential information
Departing employees are prohibited, at common law, from using confidential employer information, such as trade secrets, to compete with the former employer. Most employment contracts will also contain provisions restricting employees from using confidential information or work product for any purpose outside of the company. This restriction is indefinite.
If a former employee has stolen confidential employer information and is using it to the detriment of the employer’s business, the employer will have options to take action.
Competing with the Employer
While a former employee cannot legally use the employer’s confidential information to compete with the former employer, unless they entered into a non-competition agreement they are otherwise free to compete.
As I’ve discussed in the past, non-competition agreements are preemptively unenforceable. Courts see the restriction of competition as a restraint of trade and contrary to public policy. A reasonable non-compete agreement may be enforceable if the employer’s business is particularly vulnerable to competition by the former employee and if the covenant is limited in terms of activities, time and geographic scope. It will not be possible to prevent a former employee from competing indefinitely.
Solicitation of Clients
Even in the absence of a contractual non-solicitation provision, departing key employees may still be prohibited from soliciting the former employer’s clients. This will be the case if they held the position of a fiduciary. If the employee was a fiduciary, they held a responsibility to put the employer’s interests ahead of their own. Where a departing employee has the ability to affect the former employer’s business because of their unique position of trust, they cannot use that position against the former employer.
If the departing employee was not a fiduciary, restrictions can be placed on their ability to solicit the former employer’s client and customers by way of a non-solicitation agreement. This should be done at the outset of the employment relationship. If there is no non-solicitation agreement, the employer will be vulnerable.
Like non-competition agreements, non-solicitation agreements are presumed to be unenforceable and must, therefore, be similarly reasonable. In general, non-solicitation agreements are easier to enforce than non-competition agreements.
What to do
If the former employee is committing one of the above sins and immediate harm is coming to the employer’s business, the employer can go to court seeking an injunction. A successful injunction will require the employee to stop what they are doing immediately while the employer’s lawsuit against the former employee makes its way through the court system. To successfully achieve an injunction an employer must satisfy the following test:
- There is a serious issue to be tried
- There is a threat of irreparable harm to the former employer if the prohibited activity continues
- The balance of convenience favours the employer — i.e. which party will suffer the most harm from either the granting or refusing of the injunction
A departing key employee can do serious harm to a business. Concerned employers should get legal advice regarding their options. As the saying goes, the best offense is a good defense. Consult a lawyer at the beginning of the employment relationship to set up enforceable contracts and restrictive covenants and prevent issues down the road.