As the economy picks up and businesses begin to grow and hire again, there are increasing opportunities for employees to move jobs. If high performing employees move to competitors this can pose a significant threat to a business and you should have no doubt that your competitors will be interested in your best staff. The question for businesses is: are you taking steps to limit the competitive damage leavers can do?
There are three areas you should focus on when looking at the steps you can take to protect yourself from ex-employee competition. These are:
- notice periods
- garden leave
- contractual restrictions, both in relation to confidential information and restrictive covenants.
I have advised on a number of ex-employee competition scenarios over the last few years and I continue to be surprised by how often businesses have failed to take adequate steps to protect themselves from competition by ex-employees. Accordingly, in this article I look at common errors I have seen. Businesses would be well advised to make sure they are not making similar errors.
This may seem an obvious point but one of the key ways of protecting your business is to ensure that your employees have to give a reasonable period of notice in the event that they resign. For example, if one of your employees can resign on one week's notice he could be working for a competitor before you have had a chance to react to the situation. If the same employee was on three months' notice then you would have three months in which to manage his departure and ensure that other members of staff have time to develop relationships with his key clients.
As surprising as this may sound, I have come across more than one case in which senior managers or other staff with strong relationships with customers were entitled to resign by giving just one week's notice or even no notice at all.
Additionally, if your employees are allowed to leave on little or no notice then you risk this having an impact on the enforceability of any restrictive covenants in employees' contracts. I will come to restrictive covenants in more detail later in this article. Courts will only enforce restrictive covenants if a business can show an ex-employee represents a real competitive threat. If an employee is allowed to leave on little notice it will be difficult to persuade a court that he was important enough that it should enforce a restrictive covenant.
Another important step businesses can take is to ensure they have a contractual right to put employees on garden leave (ie effectively suspending employees during their notice period). During any period of garden leave an employee's implied obligations continue to apply, including an obligation not to compete with his employer.
Whilst employers will sometimes have good reasons not to exercise a right to put employees on garden leave, it is important to have that right. If departing employees are placed on garden leave that should keep them away from customers, fellow employees and suppliers for the duration of their notice period. This gives an employer more time to manage an employee's departure. If combined with notice periods of a reasonable length (see above) it can be particularly effective.
Some employers may decide that an employee can be better monitored within the workplace (rather than out of sight on garden leave) and therefore decide not to exercise such a clause. However, if you do not include a garden leave clause, you are limiting your options.
Whilst employers may decide to take a risk and enforce garden leave without a contractual right to do so, this could be fatal for an employer's ability to rely on any post-termination restrictive covenants as it potentially puts the employer in fundamental breach of contract. I therefore strongly recommend including garden leave clauses in contracts for any employees who potentially pose a competitive threat.
Contractual restrictions – confidentiality
In the absence of any contractual restrictions, employers who want to prevent ex-employees or contractors from misusing confidential information in future ventures will have to rely on common law obligations of confidentiality (or sometimes intellectual property rights). However, common law obligations of confidentiality are limited to genuine 'trade secrets'. What is known as 'mere confidential information' is not protected at common law and this will usually include such vital information as client lists and pricing information.
No employer would want 'mere confidential information' falling into the wrong hands but, in the absence of express contractual obligations restricting its use, ex-employees will be able to use such information for the benefit of future employers. It is therefore very dangerous for a business not to include proper restrictions on the use of confidential information in contracts of employees and contractors.
Additionally, not only is it vital to include confidentiality clauses, it is important to make sure that the definition of confidential information covers what you want it to. To take an example from a case I was involved in a couple of years ago, there is no point in accusing an ex-employee of stealing confidential information if the information you are referring to is HR/employee related but your contracts define confidential information only in relation to customer information!
Contractual restrictions – post-termination restrictions
The focus of many businesses when it comes to employee competition is on restrictive covenants. For example, these may be clauses stating an employee cannot work in a competing business for six months or cannot solicit an employer's customers for a similar period. These are important but I would hope that this article so far illustrates that they are not the only important steps an employer can take to protect its business.
Whilst businesses will often focus on their restrictive covenants, this is still an area in which I see some quite surprising mistakes. The key point is that the courts will start from a general presumption that post-termination restrictive covenants are unenforceable because they are a restraint of trade. It will be up to the business seeking to rely on them to persuade a court that a covenant is enforceable. To be enforceable it will need to be aimed at protecting a 'legitimate interest' and be reasonable in scope so that it goes no wider than is required to protect that interest.
Common mistakes we see include:
- Major drafting errors where, for example, a definition of products an ex-employee is not meant to compete in relation to refers to a further definition (say of a Restricted Business or Restricted Services), which has been missed out of a contract. If the courts cannot work out what a restriction is intended to mean, they are unlikely to enforce it.
- Vague definitions of areas of business in respect of which an ex-employee is not allowed to compete. Again, if the courts form the view that an employee cannot work out what he is meant to avoid doing, they are unlikely to enforce a restriction.
- Covenants that are, intentionally or not, drafted in such a way that they apply to a large global business's entire operation. This can mean that employees are restricted from, say, soliciting customers of far-flown parts of the business whom they have never met and over whom they have no influence. A court may be unwilling to enforce such covenants.
- Non-solicitation of employees covenants that apply to all employees rather than those who actually pose a competitive threat to an employer. If an employee is effectively prevented from soliciting a cleaner or administrative assistant who has no relationship with customers then a court is likely to decide that the covenant provides an employer with wider protection than is necessary and decline to enforce it.
The key points are that, to be effective, restrictive covenants need to be clearly drafted and protect a business from genuine competitive threats but go no further. They also need to be relevant to an employee's role and it is often, therefore, a bad idea to have one-size fits all covenants that apply to an entire workforce. Employers are often uncomfortable with settling for narrowly drafted covenants that stand a good chance of being enforceable because they perceive wider covenants as having more deterrent effect. They will often have this effect and cases in which you actually decide to litigate over restrictive covenants will be rare. However a covenant will be no deterrent at all if an employee goes to see a lawyer and is advised it is too wide and unenforceable!
What should you do?
All employers, and particularly those who are well-established and may have some employees on old contracts, should review employment contracts regularly to make sure they provide the protection they need. This is particularly important where employees have changed roles or been promoted and existing restrictions may no longer be relevant to them. All too often, employers only become aware of defects in contracts when a dispute arises.
Whilst it may be difficult to persuade long-serving employees to sign up to new contracts, there may be strategies that can be deployed to achieve this. In any event, there is a clear opportunity to ensure that new joiners start on contracts that take the above lessons on board and provide you with the protection you need.