During the employment relationship, many employees, and particularly those occupying management and executive team positions, will have access to business critical information. This could include arrangements with customers and suppliers, financial information such as sales and profit figures, projections, business plans or salary and benefits information for key employees.

During the employment relationship, certain implied duties owed by employer to employee, such as the duty of fidelity and confidentiality, will act to protect the business in the event of an employee using confidential information for their own interests. Some employees will also owe fiduciary duties to the business.

When employment terminates, an employee will continue to owe their employer an implied duty of confidentiality, however, this will cover confidential information that amounts to a genuine trade secret only (Lansing Linde Ltd v Kerr [1991] 1 WLR 251). This is business or trade information which is highly classified and which, if disclosed would likely cause real or significant damage to the business. This will be information that will have been disseminated on a very limited basis.

Outside of the highly classified trade secrets, other ‘mere confidential information’ falling outside the definition will not be covered by the implied duty of confidentiality, and could arguably be disclosed or used by an employee on termination of their employment.

It is for this reason that many employers impose their own post-employment contractual restrictions, in the form of express confidentiality clauses and restrictive covenants. These types of clause are commonly and more appropriately placed into the employment contract rather than a company policy or handbook because:

1. They need to have contractual effect. Many employers will have handbooks and policies which are not contractually binding in order to give them maximum flexibility to update or amend as necessary.
2. Restrictive covenants must be drafted with specificity based on the employee they are intended to apply to. A widely drafted set of covenants which are generally applied to an entire workforce or group of employees risks being unenforceable and thus not providing the business with the protections that were intended.

In a two-part feature for Legal Island, we will:

• provide an overview of how a business can effectively use restrictive covenants in the contract to protect its confidential information and legitimate business interests after the employment relationship has ended; and

• provide tips for employers on how to maximise protection of confidential information on a day to day basis, and provide guidance on the drafting of confidential information clauses or agreements.

Restrictive Covenants

A restrictive covenant is a contractual clause that intends to restrict the activities of a worker for a limited period after the employment relationship ends.  They afford protection to businesses from confidential information and knowledge being used against them to the extent it will have a damaging impact. However, the starting point for the courts when it comes to such clauses is that they are void and unenforceable on public policy grounds. The covenants will be considered a restraint of trade and therefore a court must carefully weigh up the business interest of enforcing the covenant, against the impact on the liberty of a worker.

A restrictive covenant will therefore only be enforceable insofar as a business can establish that it is no wider than is reasonably necessary in order to protect legitimate business interests.

Careful and tailored drafting is therefore a critical component to ensure that a restrictive covenant will have some teeth should a business be required to consider enforcement at a later date. Before drafting covenants, a business should consider the following.

1. Are there any legitimate interests that the business needs to protect? If so, what are they?
2. The employee in question, including what access they have to clients or suppliers, or to confidential information such as business strategy.
3. What relationships did the employee have in the business with other members of staff, including those who may be considered key employees?
4. What restrictions can be imposed to protect those legitimate business interests, including in terms of territory and duration?
5. Are those restrictions no wider than is reasonably necessary in order to protect those interests?

Drafting Restrictive Covenants

There are various types of covenants that can be included in the contract, each one having a different purpose and effect. These are as follows.

1. Non-compete

a) This operates to limit the worker’s ability to work for or be involved in a competing business. It is drafted such that it would have an impact on the ability of a worker to earn a living so is therefore the hardest of the covenants to enforce.

b) When drafting a non-compete clause, a business should consider

1. The particular business activities which the employee carried out that compete with your business.
2. An appropriate geographical area. Matters such as where the business trades or carries out business will be relevant considerations here, with emphasis on what damage could be done if the employee continued to operate in that area.
3.  A reasonable period of time that the covenant should last. In this case it is important to consider how long it might take for the employer to re-establish relationships with key business contacts after the employee has gone. The duration of covenants will depend on individual factors and there are no fixed rules on what constitutes a reasonable time period. However, in the context of the employment relationship, 12 months is at the uppermost end of what might be considered reasonable
4. The legitimate interest in this case will commonly be the protection of confidential information.

Non-dealing

a) Non-dealing clauses can be applied in respect of clients or suppliers and provide that a former employee cannot deal with a relevant contact even if they are approached by the contract concerned.

b) When drafting a non-dealing clause, a business should consider:

1. That it covers clients or suppliers with whom the employee had material dealings.
2. That it extends only to those clients or suppliers that the former employee dealt with during a reasonable period prior to termination.
3. The duration of the covenant. In practice, employers may be able to apply slightly longer time periods to a non-dealing restriction depending on how extensively it is drafted, the reason being that it will not impose the same level of restriction on an individual’s ability to work as a general non-compete.

Non-solicitation

a) Non-solicitation clauses will prevent the former employee from contacting clients or suppliers with a view to doing business with them. The difference between this and the non-dealing clause is that if the contact reaches out to the ex-employee voluntarily, the ex-employee is permitted to deal with them. For this reason, they are more likely to be enforceable than a non-compete or non-dealing clause, but perhaps harder to prove breaches of.

b) The same principles will apply to the drafting of a non-solicitation clause as a non-dealing clause

Non-poaching.

a) Non-poaching clauses apply to other employees or workers in the business and are aimed at preventing a former employee from enticing away others from the business, usually within a certain category or level of seniority (often referred to as “key employees” or “key personnel”).

b) When drafting a non-poaching clause, a business should consider

1. What confidential information the employee may have about their colleagues, including in relation to their skills, qualifications and pay/benefits package.
2. The potential damage caused to a business by the poaching of staff members, or category of staff members. This should include considering the skill set or experience of certain employees, labour market demand and the dependence the business has on a particular group or category of employees.
3. The level of interaction the employee in question has with staff members.

c) Non-poaching clause will not prevent against another employee moving to a new employer, and it may be difficult for a business to prove that there has been a breach of a non-poaching clause if the new employer has properly advertised a vacancy or used an external recruiter to make contact.

Interaction with Garden Leave

The use of a garden leave clause in an employment contract can act as another effective and immediate means of protecting business interests, usually actioned after receiving notice of an employee’s intention to leave. Under a garden leave clause, an employee is prevented from undertaking any work during their notice period.  Employers who include a garden leave clause in an employee’s contract have the option to place an employee on garden leave with the aim of limiting their contact with clients, suppliers and other employees, restricting access to company premises and databases, and distributing work or existing client relationships elsewhere in the business.

However, businesses should be aware of the interplay between restrictive covenants and garden leave clauses. It will often be expected that the time an employee spends on garden leave will be offset against the length of a restrictive covenant that operates post termination.

If garden leave is to be an option that a business uses as a means of protecting its interests and confidential information, a clause should be included in the employment contract which sets out when an employee can be placed on garden leave, what activities the business can restrict during that period and how it interacts with restrictive covenants.

Note that during a period of garden leave, an employee should not suffer any deductions to their pay and benefits.

The advantages of garden leave clauses are that they are effective immediately to limit the damage that might be done by a departing employee. They are also much more likely to be enforceable than restrictive covenants.

Conclusion

There are a range of different ways in which a business can maximise the protection of its interests and confidential information during employment.

However, the extension of protection beyond the employment relationship will often necessitate the careful drafting of agreements or additional covenants in the employment contract.

Regardless of the type of restrictive covenant a business includes in a contract, the same principles will apply and therefore be considered by an employer. That is:

1. That there is a legitimate business interests that needs to be protected; and
2. The restriction is no wider than is reasonable in order to protect legitimate business interests.

Consultation

The government in Great Britain has issued a consultation, seeking views on whether post-termination restrictions in employment contracts should be:

(1) banned entirely; or

(2) whether new restrictions on these clauses should be introduced, such as requiring that ex-employees are paid for the duration of the restriction or whether they should have a statutory maximum duration.

The consultation has closed and the outcome is still awaited. There is no timescale for the response. However, it is unlikely that post-termination restrictions will be outlawed entirely; a 2016 Call for Evidence found that most employers felt that restrictive covenants worked well and did not unfairly impact on an individual’s ability to find new work. However, the government in Great Britain has stated that it has issued its consultation in response to the economic impact of the pandemic, in order to explore ways to increase competition and create new jobs. It would, therefore, be advisable to keep this consultation under review, but no change is expected in the short to medium term.

More information

TLT’s Employment team has a wealth of experience in drafting and litigating on post-termination restrictions in employment contracts. If you would like to know more about how these clauses work in practice, please register for our free webinar on 29 June 2022, at 10.00-11.00am. Our experts will explain:

1. what steps businesses can lawfully take to prevent an ex-employee from taking advantage of confidential information and strategic plans;
2. what to include in employment contracts;
3. what you can do if an ex-employee sets up in competition or seeks to poach your
4. clients or staff;
5. team moves.

To register for this webinar, please email: raluca.popu@TLTsolicitors.com