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Many businesses will recognise the threat of harmful competitive activities of employees and ex-employees and the potential impact of disclosure of trade secrets and confidential information by such individuals. The law allows businesses to protect themselves against this by the use of confidentiality clauses and restrictive covenants. The extent of the protection that the law offers to employers depends largely on the nature of what the employer is seeking to protect and how they go about doing so. This fact sheet looks at the ways in which employers can try to protect themselves against the competitive practices of both current and former employees.
For most businesses, their confidential information is a key asset and it is essential that this is protected. Confidential information can include a wide range of information including; manufacturing processes, formulas/recipes, customer lists and databases as well as pricing information and supplier lists. It is also crucial to the smooth running of most businesses that employees have access to this information in order to properly perform their roles. During employment, an employee is under an implied duty of confidentiality and therefore is under an obligation not to disclose to unauthorised third parties their employer’s confidential information and trade secrets obtained during the course of employment.
However, as well as implied duties of confidentiality it is also very useful for employers to be able to rely on contractual duties of confidentiality, and for this reason it is advisable that confidentiality clauses are included in employment contracts, making it clear that individuals must not reveal such information during employment. The benefit of having a specific confidentiality clause is that this can define the information that the employer classes as confidential, and where this is breached by individuals, disciplinary action can be taken.
However, not all company information will be considered confidential information; any information which is already available within the public domain will not be confidential and therefore cannot be protected; the principle being that the individual could have been made aware of the information without being an employee.
In addition, it is important to note that an employee's duties in respect of not disclosing confidential information will not prevent them from making a protected disclosure and receiving protection as a whistleblower. For further information see:
FS21.02: Dealing with whistleblowing
Once the employment comes to an end the position in terms of confidential information changes. When an employee leaves employment, they are generally free to use the skills, training and knowledge gained during their employment. However, employers are still entitled to protect their information which can properly be classed as a trade secret without having to include any additional provisions on confidentiality within the contract. There is no set definition of what information amounts to a trade secret, however, it is likely to constitute information which, if disclosed to a competitor, would be liable to cause significant damage to the employer’s business. This may include: secret manufacturing processes, chemical formulae, designs or special methods of construction, customer lists and confidential price lists. In determining whether information is a trade secret, the court will have regard to the nature of the employment, the nature of the information, whether the employer impressed on the employee the confidentiality of the information and whether the relevant information can easily be isolated from other information which the ex-employee was free to use or disclose.
However, in addition to the implied protection of information which amounts to a trade secret, employers are also advised to include specific wording on confidentiality in their contracts of employment to protect themselves from post termination breaches of confidentiality which may have an impact on the business in terms of improper disclosure and use by departing employees. Without including specific wording on confidentiality following the termination of employment the only type of information that will be protected are trade secrets, rather than mere confidential information. Trade secrets is the highest category of confidential information and it is a fairly high bar for information to be classed as such. It is likely that there will be information which the employer considers to be highly confidential, which may damage the business if it were divulged, but that does not meet the requirement of being a trade secret, and therefore without specific clauses in the contact covering this the employer leaves itself vulnerable to such information being used by ex-employees.
By including specific confidentiality clauses the employer therefore widens the category of information that is capable of protection, as well as making it clear to the ex-employee which information they cannot disclose. By including specific wording on what sort of information is protected employers are much more likely to be able to show precisely what information is important to them, what is covered by the provisions of confidentiality, and any argument over what is or what is not included is significantly reduced.
Restrictive covenants will often be used by employers solely as a deterrent to discourage employees from certain actions once their employment has come to an end, without any intention to actually take enforcement action on this in future. In those circumstances employers will often use standard restrictive covenants for individuals in a wide variety of roles and levels of seniority, without any real consideration as to whether or not they are likely to be enforceable on termination. Such clauses may act as a useful deterrent, but if an employer wishes to be able to rely on the restriction in future then careful consideration needs to be given as to how the particular covenants are drafted for the individual in order that they protect the specific business interest without going further than is necessary in order to do so. It is crucial that any employer who wishes to be able to rely on restrictive covenants in future for key employees speaks to their legal advisor regarding the type, scope and duration of that restriction in order to give the best possible chance of this being enforceable in future.
Post termination restrictive covenants will typically seek to prevent a former employee from:
Working for a competitor, or carrying on a competing business on the employee’s own behalf (non-compete covenants)
The soliciting of the employer’s clients or customers (non-solicitation covenants)
Dealing with the employer’s clients or customers (non-dealing covenants)
The soliciting of the employer’s other employees (non-enticement covenants)
In relation to each restriction thought needs to be given as to how wide the clause needs to be in order to protect the company's business interests in relation to the specific employee who they are trying to restrict. Consideration needs to be given to the scope, geographical reach and duration of the restriction in terms of what the company can legitimately protect; the narrower and more limited the better in terms of enforceability. For example, in terms of restricting future dealing with customers, this should usually be narrowed to those customers with whom the individual dealt with during a time period (e.g. 12 months) prior to their employment coming to an end.
The duration of the restriction will often be a key consideration when drafting these covenants. Again, generally speaking, the shorter the restriction the more likely it is that this will be enforceable and a careful through needs to be given to what will be sufficient protect the business, for example employers should ask themselves realistically how long is long enough to secure the client relationships they are concerned will be threatened by this employee leaving their employment. Employers may automatically default to a duration of 12 months for example, but would 6 months, or 3 months be sufficient? Cleary, the employer will want to give itself as much protection as possible, but should also bear in mind that an unduly wide restriction is likely to be unenforceable and therefore the protection will be lost altogether. The courts will not re-write the restriction for the employer that is something less onerous in order to make it enforceable, and therefore it is crucial that careful thought is given to the scope of the restriction and that employers seek advice from their legal advisor when considering what restrictions should be included and how these are drafted. Normally, the whole covenant will fail unless the court can take what is unreasonable out of the covenant by applying the ‘blue pencil’ test i.e. by deleting the offending words of the covenant while leaving the meaning intact, however, the best approach is remove any argument on interpretation by getting the drafting right at the outset and keeping the wording under review for key employees to ensure that it remains fit for purpose.
It is important that when a contract of employment contains restrictive covenants that this is singed by the employee; it is very unlikely to be sufficient to argue that by working to the contract the employee has impliedly accepted the restrictions, even though it remains unsigned.
When an individual is given a contract including restrictions at the start of employment it is very clear that the restrictive covenants are part of the new employment for which the individual is being paid a salary and receiving agreed benefits. However, where an employer seeks to introduce restrictive covenants during employment, in order to be able to enforce that covenant, the employer will need to be able to demonstrate that the employee has received some real benefit (consideration), specifically in relation to this. Such benefits may include a pay rise, improved pension, or healthcare provisions. Therefore, in order to assist in terms of enforceability employees should be asked to sign new contracts and the benefits they are receiving in return made clear to them. It would not be sufficient for an employer to argue that a co-incidental pay rise, for example, which they would have received anyway regardless of whether or not they had agreed to the new restrictive covenants, is evidence that specific consideration has been received and so the link between the agreement to enter into the restrictions and the benefit/consideration they will receive in return should be made explicit.
Where an individual does not agree to accept a new contract containing restrictions, it may be possible for an employer to insist on an employee accepting a restrictive covenant and then to fairly dismiss the employee on SOSR (some other substantial reason) grounds if they refuse. It will depend on whether the employer acted reasonably or unreasonably in treating that reason as sufficient to dismiss the employee.
Another important point to note is that the courts will consider whether or not the covenant was enforceable at the point it was entered into by the employee. This is even the case where the covenant was not enforceable at the time it was entered in to but later became relevant – for example a junior, inexperienced employee who becomes more senior within an organisation and develops key contacts. If the restrictive covenant was entered into at the start of employment then it is not enforceable as it would not have been enforceable in the circumstances of the employee at the time, regardless of the fact that by the point the employment ended it had become so due to the individual's changing position.
Therefore, whenever an employee changes roles or jobs within an organisation, whether a promotion or side ways move, an employer should consider whether new restrictive covenants should be drafted for the role. If restrictive covenants are important for a particular employee, then specific covenants should be considered and drafted and included in a new contract of employment, reflecting the change in role in the same way as someone who is recruited externally.
If an employer dismisses an employee wrongfully (in breach of contract), or otherwise commits a repudiatory breach of contract, they will usually be prevented from enforcing any restrictive covenants in the ex-employee’s contract of employment, as these will effectively fall away. One potential area of concern is if an employer chooses to make a payment in lieu of notice (PILON) to an employee where there is no contractual right to do so within the contract. By doing so there is technically a breach of contract and therefore the argument is that the contract falls away and the employer can no longer rely on the restrictive covenants. Clearly, the way in which to deal with this is to ensure that a PILON clause is included in the contract in case the employer wishes to rely on this in future.
If an employee is dismissed for gross misconduct but the misconduct did not amount to gross misconduct, this will not only be an unfair dismissal but also a wrongful dismissal, again enabling the employee to get out of the restrictive covenants. Employers therefore need to be careful when dismissing a key individual where the ability to rely on restrictive covenants is crucial, that the actions complained of do in fact amount to gross misconduct.
The same principle would apply where the employee resigns alleging constructive dismissal on the basis of fundamental breach of contract/breach of the employer’s duty of trust and confidence: some employees may purport to do this to avoid having to be bound by their post-termination restrictive covenants.
An employer may restrict or deny an employee who has resigned and is working out their notice period access to confidential information and/or customers, suppliers and clients by placing the employee on garden leave. A garden leave clause has the effect of requiring an employee to serve their period of notice at home. During the period of garden leave, the employee would be entitled to their full salary and benefits, while at the same time they must not work for anyone else and they continue to owe obligations of good faith and confidentiality. The aim of the employer in imposing garden leave is to maintain the employee’s fidelity whilst at the same time ensuring the employee does not maintain his contacts with the employer’s customers, suppliers, clients and confidential information.
For garden leave to be enforced there must be an express clause included in the employee’s contract of employment. Otherwise, putting an employee on garden leave could amount to a repudiatory breach of the right to work, and may invalidate any restrictive covenants, in the same way as the example of the PILON clause above.
When drafting restrictive covenants and specifically the period of the restriction post-termination of employment, employers should consider whether a garden leave clause would suffice instead; during the garden leave period the employee is isolated from their contacts which allows the employer an opportunity to re-direct and strengthen those relationships to try and secure these and make it more difficult for the exiting employee to cause damage to the business.
Where an employer seeks to rely on a period of garden leave followed by restrictive covenants kicking in once the employment has come to end and the garden leave concluding, it will be very difficult for an employer to convince a court that a long restrictive covenant following a substantial period of garden leave is a reasonable restraint. It is therefore recommended to insert a provision off-setting one against the other (i.e. the period of prohibition is reduced by the period for which the employee is actually placed on garden leave) in order to assist with enforceability.
A useful tactic for employers is to write to departing employees to remind them of their obligations post termination, right at the outset and before any breach has occurred in order to make it clear that any breaches will be taken very seriously and dealt with accordingly. Employers can also make it clear to those departing employees that it is crucial their new employer is made aware of the restrictions that are in force in order that they do not induce their new employee from breaching these.
However, where there have been breaches of post termination confidentiality obligations and other restrictions, there are a range of remedies open to employers. From a practical point of view the first step prior to taking formal legal action, depending on the nature and extent of the breach, will often be a letter from the employer (or their legal advisor) reminding the employee of their ongoing obligations to the company following termination, and a separate letter to the new employer reminding them of their obligations not to induce any breach by the employee, or for more serious potential breaches a letter before action requiring the individual and/or the new employer to desist from their actions, failing which, further action will be taken.
Often, this approach will be sufficient to address the issue, however if not then the next step will be to consider taking enforcement action. Such action is generally outside of the jurisdiction of the Employment Tribunal and enforcement action is generally carried out in the County Court or High Court. If you are considering taking legal action it is crucial you speak to your legal advisor as such action can be both complex and costly. Your legal advisor will discuss with you which remedy is most appropriate in the circumstances.
This document has been created by, or on behalf of ESP Ltd, as a general document and as a guide in relation to its subject matter and has not been bespoke drafted for you or the specific circumstances in which you are looking to use it. Prior to using this document and undertaking any HR process you must consult your organisation’s own policies and procedures to ensure that you do not do anything in conflict with your own policies and procedures. If in any doubt as to how to use this document or, if you require any legal advice, please feel free to contact ESP Ltd on 0333 006 2929 and our legal team will be more than happy to assist. ESP Ltd will not be liable in any way for any actions undertaken by you or your use of this document unless we have been consulted regarding your use of this document as legal advisor to your business or have bespoke drafted any documentation in response to a specific support request.