Recent statistics have indicated a rise in the number of attempts by employees or former employees to misappropriate an employer’s confidential information and trade secrets. So, how can employers adequately protect their confidential information and trade secrets through the effective drafting of post-termination restrictions in their employment contracts? And what options are available to employers in the event of a theft of this nature?
It is important to understand what is meant by ‘confidential information’. While there is no statutory definition it would generally include knowledge that is owned by and private to the business.
There is also no uniform definition of trade secrets but, again, it could cover a range of commercial and technical information. It is helpful to clearly set out what the employer means by the terms ‘confidential information’ and ‘trade secrets’ in the employment contract.
Where an employee might have access to, or knowledge of, a particular product or business plan, it would be advisable to make specific reference to this in the definitions.
While all employees owe a duty of confidence to their employer during the employment relationship, this duty does not automatically continue on termination of employment and so the contract should include a clause confirming the employee’s acceptance of their duty not to disclose confidential information during the period or their employment, or at any time after its termination.
How to use post-termination restrictions
Certain employees might also be able to cause harm to the business after their employment terminates by, for example, using their influence or knowledge of particular parts of the business or its products to solicit customers or key employees and to unfairly compete with the business.
In order to reduce the risk of this happening, employers should ensure that they have drafted effective and enforceable post-termination restrictive covenants into the contracts of employment.
Post-termination restrictions will usually include non-solicitation and non-dealing covenants relating to both customers and other senior employees, as well as non-compete covenants.
When drafting post-termination restrictions it is essential to remember that they will only be enforced by the courts (if challenged) if they go no further than is necessary to protect the ‘legitimate business interests’ of the employer.
Employers are also advised to include garden leave provisions in their employment contracts.
What is a ‘legitimate business interest’?
What amounts to a ‘legitimate business interest’ will likely include the protection of trade connections (wither with customers or suppliers); trade secrets and confidential information; and/or the stability of the employers’ workforce.
Having established a legitimate business interest to protect, the employer must then consider the effect of its proposed restrictions on each of the employees who will be subject to them, bearing in mind that the restrictions must be reasonable and not go further than the employers needs in order to protect that legitimate interest.
When drafting post-termination restrictions the employer must always consider issues such as; the relevant employees’ seniority within the business; how long they might be able to damage the business after the termination of their employment and what influence they have over other employees and/or customers or suppliers.
Reasonable restrictive covenants
It is advisable to take a relatively cautious approach when drafting post-termination restrictions and not to be ‘greedy’ as to the length or scope of the restriction. If, for example, an employee’s influence over customers will not last longer than six months because of the nature of the product in question, drafting a 12-month non-solicitation clause would very likely render the covenant unenforceable as it goes further than necessary.
Employers should regularly review their post-termination restrictions to ensure that they remain enforceable.
Protection whilst in employment
It may be reasonable to require the employee to devote all their time to the business and not have any outside interests, or at least not any work-related competing interests.
You can protect far more during employment and can require employees to maintain confidentiality with regards to trade secrets and sensitive information about the business, such as customer lists, business plans and details of financial performance. However, you cannot prevent them from using information that belongs to them, such as their own know-how and skills, or information that is publicly available.
If corporate social media is important, ensure the contract is clear that tweets, contacts or blogs and so on created in the course of employment belong to the business and must be delivered upon termination – subject, of course, to the terms of any relevant website, such as Facebook and LinkedIn.
When the employment ends
Once an employee has left, only “trade secrets” (i.e. the most highly confidential information) will be protected from disclosure at common law. To protect confidential information that falls short of being a trade secret, you need to include wording in the contract to prohibit the employee from disclosing this information once they have left. Do not draw this definition too widely or include information that is generally available, or the clause may not be enforceable.
Notice provisions that you may want to include:
- A garden leave clause is a particularly effective means of restricting the employee’s activities; it allows you to keep them out of your business and the wider market while they sit out their notice at home rather than risk them taking their knowledge elsewhere.
- Consider including a payment in lieu of notice (PILON) clause. This allows you lawfully to terminate the contract, having followed a proper disciplinary procedure, without the employee serving their notice and has the advantage of keeping the restrictions intact (restrictions will usually fall away if a contract is terminated unlawfully).
- When used judiciously, post-termination restrictive covenants can prevent an employee from joining a competitor, dealing with your clients and suppliers and poaching your staff (for a period of time). However, tailored drafting is a must if they are to be enforceable.
What to do if you suspect an employee is misusing confidential information
If you think the employee may be in breach of his restrictions or may be contemplating one, gather evidence. Talk to other staff and carry out searches of email, telephone and printing records. Check when the employee has accessed your premises and IT networks – is there unusual activity? Forensic IT specialists can conduct searches of data held on electronic devices, including files that have been deleted, overwritten or downloaded, and will know how to preserve the evidence.
However, with current employees, you should only carry out such investigations if you have reason to suspect wrongdoing and should ensure searches are proportionate to the evidence you are seeking.
It may be that legal action is the most effective way to protect your business – but this does not necessarily mean taking court action. Once you understand your options, you can decide your preferred strategy. Usually, the first step is to write to the employee and any new employer notifying them of continuing contractual obligations and requesting they undertake to comply with them; often these undertakings are given and you can move on.
However, further remedies, including injunctions to prevent competitive activities, are available through the courts if the employee wants to be obstructive. Beware, however: the legal costs and management time involved in seeking injunctions are high and you will want to make sure that the end justifies the means.
In the contracts section of our MAD-HR toolkit, we have sample contracts and sample restrictive covenants. However you should adapt these to ensure that they meet your legitimate business interest. Always seek legal advice when writing restrictive covenants. The free legal advice line is available with the toolkit too.