Protect your firm when staff leave

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Protect your firm when staff leave

Microscope contributor

 

One of the biggest problems with putting a lot of effort into developing staff is that they have a tendency to up sticks and leave. The worse case scenario is when not only do they leave but they also take your best customer contacts and set up a rival operation.

 

There are some things you can do to try and stop them, without resorting to tying them up, and some tips below should help keep resellers protected and on the right side of the law.

 

There are two key methods of preventing staff from resigning and then competing against their former employer: garden leave (which applies before the termination date); and restrictive covenants (which apply after the termination date).

 

Do we need to have express restrictions in our employee contracts?

 

The benefit of including express restrictions is that they can address the specific circumstances of the employer/employee. They may also deter employees from joining competitors and discourage potential new employers seeking to "poach" those employees, for fear those restraints will be enforced. The Courts will not otherwise imply such terms.

 

 

What is garden leave?

 

Where notice is given under an employment contract which contains a garden leave provision, the employer can insist that the employee does not attend work for the duration of the notice period. During this time the employee, who must remain on full pay, is not permitted to work for another employer or make contact with customers or employees.

 

 

What is the purpose of garden leave?

A garden leave clause keeps an employee out of the market place so that the business information they possess is likely to become out-of-date, so that the employee’s successor can develop relationships with customers and so that the employer’s goodwill is protected. The clause must be drafted to protect the legitimate business interests of the employer, such as trade secrets or the customer base.

 

 

What happens if an employee breaches the garden leave provisions?

 

The employer can apply for a court order, an "injunction", to enforce either the employee’s implied duties of honesty, loyalty and faithful service; and/or any express term such as a garden leave clause which will prohibit the employee from having other business interests during the course of employment - which includes employment with another employer.

 

Remember, however, that obtaining an injunction is just the start of what may become full-blown, and costly, litigation.

 

What should I do if an employee wants to leave immediately without giving notice?

 

By resigning without notice the employee is breaching the contract. To enforce a garden leave clause, the employer should refuse to accept the attempted termination of the contract, hold the employee to the obligation to give notice and (assuming the contract so empowers you) suspend them for the entire notice period. Where, however, despite these steps, the employee commences work elsewhere, injunction proceedings (see above) may be required.

 

 

Am I under any obligations whilst the employee is on garden leave?

 

As the employment contract continues during any period of garden leave, the employer must continue to perform all of the terms of the contract i.e. pay salary and provide all other contractual benefits, such as medical insurance and pension benefits. It should be decided whether any entitlement to bonus will accrue during the garden leave period and this should be made clear either in the employment contract or under the terms of any bonus scheme.

 

 

What should the garden leave clause cover?

 

Such clauses should give the employer the right to exclude the employee from the company’s premises while promising to continue to provide them with full contractual benefits. The employer may also reserve the right to ask the employee to carry out certain specified duties during the garden leave period. Most importantly the clause should preclude the employee from contacting clients, suppliers, or employees of the employer while on garden leave and should forbid the employee from taking up alternative employment.

 

 

How can I encourage the court to look favourably on the garden leave clause?

 

The exercise of the garden leave provision must be done reasonably with the aim of protecting a legitimate interest of the business such as confidential information or connections with customers. Where an employee is commencing employment with a competitor it should be possible to demonstrate that this may potentially damage the old employer’s business.

It should not be too long a period, as the shorter the duration of garden leave, the more likely it is to be enforced.

The period of garden leave should be limited to no more than approximately six months in aggregate, even where the period of notice required is in excess of six months.

It should be borne in mind that a court may decline to enforce a restrictive covenant after termination where a period of garden leave has already been served.

What are post-termination covenants?

 

There are three main types of restrictive covenants which can be imposed on employees:

 

A non-compete restriction prevents an employee from working in competition with his former employer. This draconian clause is normally reserved for the most senior employees and should be drafted carefully.

A non-solicitation, or "non-poaching" clause, prevents a former employee from contacting the ex-employers customers, clients, suppliers. Likewise non-poaching clauses can be used to prevent the ex-employee contacting former colleagues with the view to persuading them to leave.

A non-dealing restriction precludes former employees from dealing with any client, customer or supplier, even if that former client or supplier approaches them. No persuasion or enticement on the employee’s part is necessary.

These are just three examples.

 

Are they guaranteed to be enforceable?

 

As a general rule of public policy, post-termination restrictive covenants are unenforceable restraints of trade as they can prevent an individual from earning a living. However, if an employer can show that it has legitimate business interests to protect (such as trade connections or goodwill) and that the restrictions are no wider than is reasonably necessary to protect those interests, they can be enforceable.

 

Unfortunately there is no general guidance as to what the courts will consider to be reasonable, for example in terms of the duration or geographical extent of the restriction. Each clause is considered on the facts by reference to the business needs of the employer seeking to impose the restriction. First, the courts will look to see if there is a legitimate business interest to protect. Only then will they consider if the restraint is "reasonable".

 

 

What does "no wider than reasonably necessary" mean?

To ensure the clause is not construed as too broad the covenant should be tailored to the position of the employee and the risks posed by them on leaving. The covenant should therefore be limited by reference, not only to the restricted activities themselves, but also its geographical reach, the description of any third parties, and the duration. Without these specifics the covenant may be treated as having too wide a scope and will therefore, be potentially void.

 

 

If a covenant is too broad can the courts sever those parts so the rest remains enforceable?

 

The courts will not re-write a covenant to make it enforceable if it is too broad, and limitations will not be implied in order to save it. However, the court may sever unlawful provisions from the rest of the terms if, broadly speaking, the provisions can be removed without needing to add to or change the existing wording. If the character of the contract is changed so that it becomes a different sort of contract or it would conflict with the underlying public policy of avoiding terms that are in restraint of trade, then the courts will not agree to terms being severed.

 

 

Is confidential information already protected?

 

Employees are subject to a general implied contractual duty of fidelity and confidentiality. This requires them to keep the affairs of their employer secret, both during employment and after they have ceased employment . However, after termination , this duty only applies to information that is strictly confidential and in the nature of a trade secret. This means that post-termination, any information not strictly defined as a trade secret will need to be protected by an express provision in the employment contract.

 

 

How do we go about enforcing a restrictive covenant?

 

As a first step in the enforcement of a restrictive covenant, the employer will seek to obtain an interim injunction - a legal order prohibiting the employee from breaching the covenant. As a further step, the employer may also seek damages from the employee for breach of the covenant. All of this is just a start before proceeding to the cost of a full blown trial, as proceedings once begun cannot be withdrawn unilaterally. This presupposes that the terms are effective: in this area careful drafting not only pays dividends but is essential.

 

 

Jonathan Exten-Wright is a partner and Ashleigh Robertson is a trainee in the Employment, Pensions & Benefits Department at DLA Piper UK LLP


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