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Keeping your staff and confidential information safe from competitors

All businesses have information they consider vital to their functioning and success.

May 2014

Therefore, employers are often keen to restrict access to and use of this information by their employees.  This is much more easily managed whilst employees remain in employment, but once employees leave the business, becomes much more difficult.  Restrictive covenants are one form of protection employers can use to protect access to client and suppliers and solicitation of other employees post-employment.

Restrictive covenants

signing contractRestrictive covenants act as a deterrent both during and after employment, courtesy of their existence and the threat of enforcement.  The starting point is that restrictive covenants are void as restraints of trade (for public policy reasons), unless employers can show that the restrictions:

  • have a legitimate business interest that it is appropriate to protect, and
  • go no further than is reasonable having regard to the interests of the parties and the public.

The key point to note is that restrictive covenants should be very carefully tailored to the circumstances involved.  In particular, employers should consider:

  • any definition of the employer's business and area of business,
  • the length of any restricted period,
  • the impact of the covenant on the employee,
  • the seniority of the employee, and
  • what information it really wants to protect.

Only confidential information which amounts to a trade secret remains protected after termination of employment, so the basic starting point is to have express confidentiality provisions alongside covenants in the contract of employment.  Customer and supplier lists and information are usually capable of being protected. 

Definitions are key:  The employer's business, and where relevant the part of the business, should be carefully defined; the courts have recently deemed a recent definition of business activities which included "any business or commercial activity" carried on by the employer or associated companies, unenforceable.  Narrower and more limited definitions are more likely to be enforceable, whereas wide definitions and definitions that effectively would shut an employee out of an industry are not.  Similarly, a covenant that purportedly applied to the employee acting in any capacity (including as a shareholder, consultant and/or agent) has also recently been held unenforceable. 

calendar pagesRestrictive covenants & garden leave:  For longer restricted periods, any garden period should be off-set; the courts have refused to allow a combination of garden leave and restrictive covenants for a period of longer than 12 months, instead treating the two elements as off-set against each other.  The courts are showing a willingness to enforce longer restrictions where industry evidence suggests this would be reasonable, (recent decisions have held that 12-month restrictions were standard in the financial services, insurance and modelling industries) so think about your industry as well as the employee's seniority.

Seniority and promotions:  Employers should regularly review and update restrictive covenant provisions of employees, particularly in circumstances of internal promotion.  In PatSystems Holdings v Neilly the court held that a 12-month restriction may have been enforceable for the employee's final role, but was unenforceable because he entered the covenant when in a much more junior role.  Employers should also be looking at the level, type and length of restrictions in relation to an employee's seniority.  The Courts will look at the seniority of an employee in relation to any restricted periods and are unlikely to uphold restrictive covenants for junior employees, unless their role means that protection is needed.  The lack of comparable restrictions for more senior employees was a factor in the court's rejection of a non-competition provision in a junior employee's contract in CEF Holdings v Mundey.

Non-solicitation, non-poaching and non-dealing clauses are often viewed more favourably by the courts, because employers are not entitled to protect themselves against mere competition from former employees.  In Coppage v Safetynet Security, where the director in question was very senior and integral to his small employer, the court upheld a non-solicitation provision that prevented him dealing with anyone who had been a client or customer during employment, regardless of whether the individual had dealt with them; the saving points in this case were the narrow definitions of the business and restricted period.

Defective covenants:  Employers should also remember that, whilst courts have the power to delete words from covenants (but not to insert, the so-called "blue pencil test"), as a rule they are unwilling to re-write covenants where they are incorrectly drafted or imply limitations where restrictions are too broad.  Very rarely, where a restrictive covenant does not work due to a drafting error, the court will hear evidence as to what was intended by the parties as in Prophet plc v Huggett, where a 12-month restriction as drafted offered no protection and the courts were prepared to read in protective wording.

hands with phonesTechnology and devices

The growth of so-called "bring your own devices" (BYOD) policies, integrated and home working programs and arrangements, and similar developments have left employers more vulnerable than ever to information and control threats.  Employers do not have the same physical control of their employees' hardware as previously.  Moreover, the advent of smart devices means that employees now have more methods that ever before to record sensitive meetings, transmit data, and act outside employer supervision.  The difficulty for employers is twofold: (i) preventing the employee's action, and (ii) proving it occurred should they wish to pursue the employee and/or enforce any restrictive covenants.

Routinely, employees who are intending to take confidential or sensitive information will often do so by attaching relevant documents to emails rather than taking information in hard copy form.  Employers should have monitoring software in place to alert them to record and monitor email traffic, and to alert them to this, so that they have evidence of this should they wish to pursue the departing employee and enforce restrictive covenants.

Employers have to constantly balance their need to monitor and track employees with those employees' rights to privacy, data protection and general employment rights.  The advent of wearable technology will only exacerbate this tension.  Products such as Google Glasses present huge potential threats to employers, as well as advantages – imagine the implications of an individual filming or live streaming a sensitive disciplinary meeting, highly confidential board meeting, or incident of workplace bullying.  Employers should regularly review employment contracts, particularly confidentiality provisions, and social media, IT and email and disciplinary policies, as well as considering home working and BYOD policies.  Employers should also regularly remind employees of these policies, their confidentiality obligations and any covenants.

Networks and contacts

Contacts are another battleground for employers and employees.  Who do your contacts on Facebook, Twitter, LinkedIn, Pinterest, Instagram and so on belong to?  To a certain extent, the courts have been keen to see Facebook and Twitter as private, personal spheres, where individuals may exercise their rights to freedom of speech, whereas LinkedIn has been treated as more of a professional network, where contacts are more likely to be professional and content as far more likely to have an impact for employers.  However, this distinction is not clear cut, and the courts have struggled at points. 

Corporate Twitter and Facebook accounts are common, and companies are increasingly turning to these methods to promote their brands in new ways (the notorious Twitter debate involving Tescos, Jaffa Cakes and McVitie's amongst others have found their way onto various popular sites including BuzzFeed and YouTube).  Similarly, the growth of grassroots marketing, astro-turfing and other forms of undercover marketing mean that the distinction between public and private are becoming increasingly blurred.

The courts have started to catch up with technology, and a spate of recent decisions demonstrates an intention to at least try to balance the competing interests of employers and employees in this sphere. For more on this, read our article, The LinkedIn effect: the employer's or the employee's account?

Team moves and colleagues

green goldfish leadingThe starting point is that employers cannot stop colleagues and former colleagues remaining in contact.  However, they can try to restrict the implications this may have for their business.  Team moves and soliciting of colleagues can decimate companies, and the courts have been shown indications that they are willing to protect employers in these circumstances, within limits.  Employers should remind departing employees of their non-solicitation obligations on termination of employment, and again make sure that they have email monitoring and recording software, because evidence of wrongdoing will be vital to any action.  In recent cases, evidence of wrongdoing by employees was key: in Thomson Ecology v APEM Ltd, the court found that that the employee breached his implied duty of fidelity where the employer was able to show he had not informed his employer of a planned team poach, arranged discussions with colleagues at his home, and discussed salaries and conspired with a competitor to identify and recruit colleagues. 

If you have any questions on this article please contact us.

"Employers have to constantly balance their need to monitor and track employees with those employees' rights to privacy, data protection and general employment rights."