What are the potential business risks posed by ex-employees?

Departing employees will often have access to sensitive and confidential information such as pricing models, customer details, bid information, growth plans and strategies and classified information about products and services. They will have had the opportunity to develop relationships and connections with clients, business contacts and existing staff.

When an individual leaves and sets up in competition or joins a competitor, it raises obvious concerns and risks. Ex-employees may try to leverage the relationships they formed at their previous workplace to tempt or persuade existing staff, clients or contacts to move to their new business. They may use confidential information, for example, by seeking to undercut prices or gain an unfair competitive advantage in bids and tenders.

Does the law allow them to do this?

The short answer is ‘yes’ – if there are no contractual restrictions in the ex-employee’s contract of employment preventing it. The importance of having solid contractual protections in place cannot be overstated.

Isn’t the duty of confidentiality implied into every employment contract without needing to expressly state it?

The law implies a general duty of confidentiality into employment contracts. However, this is a limited duty, and it only applies during the employment relationship, except in relation to information that meets the definition of a trade secret (which is a very high bar).

We would therefore warn against relying on the implied duty and instead include express contractual terms. Well drafted confidentiality clauses should be tailored to reflect the type of confidential information in question and include appropriate carve outs.

The law in this area has developed over recent years so don’t fall into the trap of assuming that historic confidentiality clauses from old contract templates will still be fit for purpose or will include the full protection that you need.

Are there other implied duties which might assist where an employee is planning to set up in competition?

Statutory directors are subject to fiduciary duties, which includes a duty to not let their own interest and that of their employer conflict, along with a duty to disclose their own wrongdoing. This means that they should not take preparatory steps to compete with the business. While these duties may of be assistance in relation to those limited individuals who are subject to fiduciary duties, it is often difficult to know what conversations are being had behind closed doors, therefore expressly including a clause which seeks to prevent team moves within relevant contracts (along with other restrictions) is desirable.

We want to have the ability to stop employees from competing with us after they leave. What contractual provisions should we have in place?

Restrictive covenants are contractual clauses aimed at restricting ex-employees from engaging in certain activities, such as soliciting or dealing with certain clients or employees or joining certain businesses, for a defined period of time. However, it’s important to note that you cannot use a restrictive covenant to prevent competition in and of itself. There must be a legitimate business interest to protect, for example, client and employee relationships, the stability of the workforce, intellectual property, or confidential information.

In addition, the restrictions must go no further than is necessary to protect those legitimate interests. If they do, they will be unenforceable. The courts will not enforce restrictive covenants that are too wide, too vague or ambiguously drafted. They need to be tailored to the individual employee – this means thought should be given to the employee’s role, seniority, connections and the industry they are in – there is no ‘one size fits all’ approach.

Restrictive covenants should also be regularly reviewed because business interests change and develop over time, along with the seniority of employees and information available to them (and therefore their ability to damage the business). A court will assess the enforceability of a covenant by reference to the time that they were entered into (as opposed to at the end of the employment relationship).

Do we also need garden leave clauses in addition to restrictive covenants?

Yes. A well drafted garden leave clause means that the employer has a level of control during an employee’s notice period, including the ability to require them to stay away from the workplace, stop working (or undertake only limited tasks), and refrain from contacting clients, colleagues and connections.

Garden leave is often the better way to keep an individual ‘out of the market’, given that they remain employed (and therefore subject implied duties such as good faith, as well as any express contractual protections) and will continue to get paid. Contrast this with seeking to enforce restrictive covenants, which are (usually) unpaid (which creates a lack of incentive on the part of the employee to comply) and, given the employee is no longer employed, it can be difficult to obtain evidence of breaches of the same.

Access to confidential information, IT systems and contacts can be blocked or limited during the garden leave period. Where necessary, it gives the employer time to conduct an investigation (for example, if they suspect the individual has taken confidential information). It also allows the business to achieve an effective handover and cement relationships with the customers and contacts that the departing employee had relationships with.

If an employee is forced onto garden leave without an express contractual right to do so this will be a breach of contract which could lead to a constructive dismissal claim – which could also result in other contractual protections, such as restrictive covenants, falling away.

What can we do to restrict post-termination comments?

It is not uncommon for ex-employees to ‘bad-mouth’ their previous employer or spread untruthful or damaging rumours about them. This may be motivated by a breakdown in the relationship or as an attempt to poach business or contacts. Again, if you have a well drafted contract, there may be provisions that can be relied on (rather than, for example, having to meet the test for defamation), which will assist in the event the business wishes to send any ‘cease and desist’ type correspondence.

Does the Employment Bill change anything in relation to post-termination restrictions?

There’s nothing in the Bill which proposes to change the legal landscape relating to restrictive covenants. Back in December 2020, there was a consultation which garnered views on introducing new legislation in this area, including the possibility of removing the ability to include non-compete restrictions or otherwise requiring any such restriction to be paid. However, that seems to have fallen by the wayside (at least for now) and therefore the existing law as outlined above continues to apply.

Any final words of advice?

The time and cost involved in anticipating possible issues on exit and having contracts tailored to protect and future-proof your particular business interests will pay dividends.

Such terms should be negotiated at the beginning of an employment relationship, but it is possible to agree new business protections with existing staff – and thought should be given to tying this to promotions or increased remuneration packages – so don’t be deterred by thinking it is too late.

Our Employment team are experienced in helping employers achieve the best possible business protection.  Our civil litigation team has also produced a key steps document, to help you deal with a situation where you believe an employee has taken confidential information or is in breach (or planning to breach) restrictive covenants.