Employment & HR: How to protect your business when someone leaves

Employers are often concerned about outgoing employees taking business away from them, poaching key staff members, or generally being an asset to a rival business now that they’ve left.

Employees’ duties are to build rapport and relationships with key customers and contacts in a people-facing business and the individual whom your customer or client deals with can become more important than the company itself. That person can become the only person whom the customer or client wants to deal with.

So, where do we start in giving that advice to an employer?

The first and most important point to make clear is imposing and then enforcing post-termination restrictions against employees is not straightforward and any proposed restrictions must be specific in scope to the employee’s role. To have a post-termination restriction that can be enforced, care and thought need to be given at the time the employee enters into that restriction, to ensure it is reasonable given that person’s role in your business.

The legal test may be that a post-termination restriction can only be enforced if the employer can show (prove) that it has a legitimate proprietary interest to protect, that it is appropriate to enforce and the protection sought is no more than is reasonable having regard to the interests of the parties and public interest.

Unsurprisingly many cases over the years have looked at the enforceability and reasonableness of restrictive covenants which are effectively clauses that restrain an individual’s ability to compete or trade for some time.

Trade connections, trade secrets or confidential information, and the stability of the workforce are proprietary interests that can be protected by an employer.

To be reasonable the level and duration of the protection sought should be tailored according to what is appropriate for the specific employee and the business in which they operate and their duties and scope of influence in the business.

If an employer wishes to seek protection after an employee has left, several steps need to be carefully considered:-

The Employment Contract

There is no ‘one size fits all’ approach that provides blanket protection and post-termination competition irrespective of the employee or business circumstances.

The starting point is to draft the Contract of Employment with specific consideration to the scope and level of protection that is reasonable for the business to seek from that particular employee and for how long. Careful thought needs to be given to the employee and their duties and the influence that they might be able to exert if they left.

A junior employee with no client-facing or trade connections is in a different position to the business’s top salesperson or key account executive dealing with the top clients every day. A generic or stock series of protections will not work in all circumstances and as employees progress in the business and change roles then a regular review of these provisions is also needed to ensure they remain relevant to the role and the employee’s duties.

Well drafted clauses that define what confidential information or trade secrets are in the context of your business and which need to be protected so that both parties have addressed their minds at the outset of the relationship as to what a reasonable level of protection might be.

Equally careful and specific consideration of the employee’s role in the business will help shape the nature, scope, and duration and ultimately the reasonableness of the protection sought.

Early and specific advice needs to be taken to tailor any post-termination restriction and ensure it’s drafted in such a way it offers the protection you seek.

Notice period

A longer notice period can also keep an employee within your business and away from employment with a competitor for a long period.

Commercially, however, it is a balance as a short notice period releases the employee to take up alternative employment while a longer period keeps the employee in the business both at greater cost and the risk of an unmotivated and potentially toxic employee within the business.

The level of notice that might be appropriate must also be considered with a well-drafted garden leave clause which would keep the employee away from key clients but also keep them away from the business as a negative and damages influence. These are considerations as you draft the initial Contract of Employment which is such a key document to consider carefully at the outset

Garden leave

In all notice periods in a Contract of Employment, the employer needs to include all the options available to them. The first option is to pay in lieu of notice to remove the employee immediately from the business. A further option is to require the employee to work out their notice undertaking their normal duties. Depending on the circumstances of their departure an immediate parting of the ways or asking them to continue working until the end of their notice can manage a departure for the business’s best interests. You need to retain the right under the contract to decide.

Finally, the inclusion of a garden leave clause in the Contract of Employment can always be very helpful, particularly for senior employees who have long notice periods.

A garden leave clause keeps the employee employed and within the business but requires them to remain away from the office and not to contact staff or customers i.e. stay at home.

This clause keeps the employee out of contact with staff and customers and clients and can buy time to implement a plan to minimize post-termination competition and disruption and take steps to cement the goodwill of the business with the employees replacement or other key employees without the employee being able to speak to clients or customers without breaching their contract with you.

Post-termination restrictions

We come back to where we started. Well thought out specific restrictions that are reasonable both in scope, nature, and duration can be enforced through court action in the event of a breach.

It is beyond the scope of this note to set out all the factors and considerations needed when drafting such clauses.

The employee’s role and the specifics of your business need to be explored and considered carefully.

Typically we see restrictions against the employee soliciting or acting for key clients of the employer with whom they interacted during a period leading up to their departure for a set period after they leave in their new employer’s role.

Employees are prevented from using confidential information which they acquired during their previous employment and so such actions such as removing client lists, misusing commercially sensitive information, or removing databases are clear breaches and can be enforced against an employee with an injunction if necessary in series cases of misuse to damage your business.

The non-poaching of key staff from the employer or the solicitation of teams of key employees in the business to a new employer can also be restricted and protected.

How long?

The unhelpful and rather glib answer is that the restriction can be for whatever period of time is reasonable in the specific circumstances of the employee and their role within the business. The more helpful answer however is that typically with senior employees six months of restriction post-termination may be seen as reasonable in many circumstances.

With senior director level appointments or senior staff in key positions who could take significant business from the employer if they left, we often see restrictions of twelve months in their contract and that period can also be held to be reasonable.

Longer periods than twelve months are typically only seen and will apply when business owners sell their business and the consideration for the purchase is the longer period of non-competition to lock in the existing goodwill for a longer period.

If a business is serious about wanting to protect its interests and wanting to impose post-termination restrictions on key employees, thought and care is required to ensure that the specific clauses which the parties enter into in the Contract of Employment or a standalone restrictive covenant agreement are thought through carefully as being appropriate and reasonable in the context of their role in the business.

Early legal advice in the drafting of such clauses is needed in the context of the Contract of Employment or in a stand-alone Restrictive Covenant Agreement for consideration. Regular review is also important to ensure they remain relevant and therefore enforceable.

That gives the employer the best opportunity to enforce a post-termination restriction should an employee be tempted to breach those post-termination obligations either through the misuse of confidential information or through other breaches.

How these post-termination restrictions are enforced and the options for enforcement from injunctions to Court proceedings is another whole topic but if the clause as originally drafted and agreed is too wide, unnecessary or unreasonable you have nothing to enforce.

There are however serious implied duties the employee owes the employer to prevent the misuse of confidential information and trade secrets and if these are combined with well-drafted reasonable post-termination restrictions that are capable of being enforced that will act as a significant deterrent to both the employee and their new employer if they leave and are tempted to breach such restrictions

They are an essential tool for employer protection but thought and care in the drafting and application is key to that protection starting as always with a well-drafted relevant and tailored Contract of Employment or Directors Service Agreement as the foundation.

This article should not be relied upon as a substitute for professional legal advice. If you are an employer seeking legal advice on a particular matter or employment dispute, please contact Peter Rolph by emailing [email protected] or by completing the form below.