Protecting your business from departing employees

Nick McQueen and Rebecca Jackson explains what firms can do to safeguard assets like confidential information and contacts from staff who leave

Credit: Audtakorn Sutarmjam/EyeEm/Getty Images

In a world where employees ‘jump ship’ to join competitors or to set up competing businesses themselves, it is vital that employers know how to protect themselves from breaches (or potential breaches) of confidentiality or restrictive covenants. 

Restrictive covenants and confidentiality provisions 

There is a risk that, during or following termination of their employment, employees or ex-employees may take advantage of confidential information, strategic plans, customer and client details or other important information relating to their employer’s business, which could be seen as beneficial to a rival business. 

Employees are subject to varied implied duties, such as the duty of fidelity, but these are limited in nature and do not generally extend post-termination of the employment. It is therefore common for employers to include, in the contract of employment, various express contractual terms with a view to preventing employees from taking and disclosing confidential information, competing, soliciting clients and poaching employees. Such provisions are often referred to as restrictive covenants, confidentiality provisions or post-termination clauses. 

What are the risks? 

There can be various traps for the unwary when drafting confidentiality provisions and restrictive covenants. For example, contracts often seek to provide an absolute prohibition on the disclosure of undefined or loosely defined ‘confidential information’, or ‘information related to the company’s business and finances’. However, the courts will not enforce confidentiality provisions which are too vague or broad in nature. 

To validly incorporate new restrictive covenants and confidentiality provisions, consideration must pass between the parties because where obligations are not mutual (ie, only the employee is agreeing to them), there is a risk that, unless the employment contract expressly clarifies what consideration is being given by the employer in return for the employee agreeing to any such obligation, the provision could be adjudged unenforceable. It’s worth considering tying a request to enter into more onerous restrictions with a promotion or pay-rise. It is also important to consider whether the requested restriction reflects the individual’s job role and level of seniority (having regard to others in the business) ie, one size does not fit all. Employers should also be aware that their approach may have tax consequences. 

Restrictive covenants in employment contracts are generally viewed more strictly than those in commercial contracts, such as those between a seller and a buyer. Unless carefully drafted, they are usually less likely to be regarded as reasonable, because of the inequality of bargaining positions between employer and employee. 

When considering the enforceability of a restrictive covenant, the courts must consider the doctrine of restraint of trade. The doctrine provides that any contractual term restricting an employee's activities after termination is void for being in restraint of trade and contrary to public policy. This is the case unless the employer can show that: it has a legitimate proprietary interest that is appropriate to protect; and the protection sought is no more than is reasonable having regard to the interests of the parties and public interest. 

To guard against the consequences of a breach of confidentiality or restrictive covenant, therefore, it is essential to ensure that the contractual provisions are drafted correctly to begin with. 

What can employers do if there’s a breach?

Employers commonly include an express term in the employment contract (or in any settlement agreement entered into following a dispute with an employee), requiring the employee to surrender any confidential information in their possession upon termination of their employment. 

Notwithstanding that, breaches of confidentiality provisions and restrictive covenants are often essentially a misconduct issue, and the first stage should be to immediately investigate the problem. Where an investigation reveals that enforcement action is required, undertakings can be sought. In the absence of undertakings being given or in the event of a continuing breach, confidentiality provisions and restrictive covenants are generally enforced using an injunction –an order from the court for a party to do something or refrain from doing something, whether on a temporary or permanent basis. 

Injunctions are an equitable remedy, which may be granted at the discretion of the court by reference to what it regards as fair in the circumstances. Where an employer seeks to obtain financial recompense following a breach of a restrictive covenant or confidentiality provision, the employer will need to demonstrate loss resulting from the breach. This will often include, for example, loss of profits on contracts, or opportunities diverted by the former employee.

Where the employee has been induced by a competitor into breaching restrictive covenants, the employer can also consider taking action against that competitor.  That may be an attractive option as the competitor company is likely to have greater financial resources to pay any award of damages.

Nick McQueen is a partner and Rebecca Jackson a senior associate at Walker Morris