Publications
FYI
Employment Law
20 Jan 2009
Protecting Your Business When Senior Employees Leave
In the electronic age it has become easier for an employee to "walk out the door" with confidential information. They no longer have to photocopy files and carry them out in a cardboard box. It is as simple as plugging a small device into their employer's computer and within a matter of seconds the information can be copied and used by a competitor.
In Peninsular Real Estate Ltd v Harris, the High Court set out guidelines on the ability of a departing employee to compete with his or her former employer. The Court said that in the absence of a valid restraint of trade clause, an employer cannot prevent a former employee from competing, or contacting/soliciting clients or customers of the former employer.
So What can an Employer do to Protect its Business when Key Employees Leave?
As the saying goes, prevention is better than cure. A good starting point therefore is to review the written employment agreements for executives and ensure that they contain the following provisions:
- Confidentiality: It is an implied term of every employment relationship that an employee must not disclose their employer's confidential information either during or after their employment ends (other than in the reasonable performance of their duties). However employment agreements should contain express confidentiality obligations to emphasise the duties on the employee. It is also important to describe the types of information that are considered to be confidential to the particular business, so that there can be no dispute over what is confidential information. In Korbond Industries Ltd v Jenkins the Court emphasised the importance of stressing the confidentiality of the information to the employee.
- Garden leave: Every employment agreement for key executives should contain what is commonly known as a "garden leave" provision. Where an employer or an employee gives notice of termination, a garden leave provision allows an employer to require the employee to not attend work during their notice period. This is particularly useful where a senior employee is going to work for a competitor and the employer wishes to prevent them from starting work straight away, but does not wish to keep them in the workplace where they will continue to have access to clients and commercially sensitive information.
- Suspension: A clause allowing the employer to suspend the employee while it carries out an investigation is also important for employment agreements. If an employer suspects misconduct or that an employee has been improperly using the company's confidential information, having an ability to suspend the employee (and cut off access to emails etc) while an investigation is carried out, may reduce any adverse impact from the employee's actions.
- Proprietary rights: It is also useful to include a clause stating that all intellectual property such as copyright, inventions, patents, trademarks, even ideas and concepts or any other products or processes developed or created by the employee arising from or in connection with the activities of the employer shall be the sole property of the employer, even after termination of the employment relationship.
- Restraint of trade: For senior or key employees, an enforceable restraint of trade clause can be valuable. This can be used to restrict an employee from undertaking employment/having an interest in a competitor's business, for a specified period of time, within a specified geographical area, after termination of employment. The purpose of such a clause is not to prevent competition indefinitely, but to give the employer time to confirm their client or customer relationships and protect commercially sensitive information. A restraint of trade can also be used to prevent an ex-employee from soliciting clients or other employees for a specified period of time. Restraint of trade covenants are prima facie void unless the employer can show that they are reasonable.
They will generally only be enforceable if: they are for a maximum of up to 12 months duration (and often only three or six months), cover a limited area (such as Auckland or Wellington), or are restricted to particular areas of business. The employee must also be given a reasonable opportunity to take advice before entering into the restraint, and consideration should be provided for entering into the restraint. The adequacy of the consideration provided to the employee may be relevant to the question of whether a restraint of trade is reasonable. Finally, a restraint is more likely to be enforced if it is tailored to the particular individual. Therefore before entering into a restraint, an employer should consider what proprietary interest it is seeking to protect, and what duration and scope is reasonably necessary to protect that proprietary interest.
Recent Employment Court Decision - Restraint of Trade
A recent decision of the Employment Court that Simpson Grierson was involved in demonstrates the value of having a well drafted restraint of trade clause.
The executive was employed in the position of Chief Financial Officer. In October 2008 the executive resigned from his position and informed his employer of his intention to take up employment with one of his employer's main competitors, immediately following the end of his notice period. The executive had extensive knowledge of his employer's business at all levels.
The executive's employment agreement contained both restraint of trade and confidentiality clauses. The restraint of trade clause prohibited the executive from working for a competitor for a period of 3 months after the end of his employment, and from soliciting clients for a period of 12 months. The executive had been paid $1,000 per annum in consideration for this restraint of trade.
Simpson Grierson was instructed to seek a preliminary injunction from the Employment Relations Authority on behalf of the employer, upholding the restraint of trade. This was granted by the Authority, but the executive challenged that determination in the Employment Court. Simpson Grierson then sought an order on behalf of the employer from the Employment Court upholding the injunction, and enforcing the restraint of trade against the executive.
The Employment Court granted the injunction on the basis that the restraint of trade was not unreasonable in the circumstances. The Employment Court accepted the submission that there was a real risk of inadvertent and/or innocent disclosure of confidential information to the competitor, if the executive was able to work during the 3 month restraint period, despite the existence of a confidentiality obligation in the executive's employment agreement, and his undertaking that he would comply with it.
Other factors which supported the enforcement of the restraint of trade included:
- there was a genuine proprietary interest to protect in the knowledge of strategic and financial affairs;
- the difficulty of establishing a breach of confidence if the executive did breach his obligations while working for the competitor;
- the reasonableness of the other aspects of the restraint (3 month duration and geographical reach limited to the same geographical area in which the executive had worked);
- the executive had freely entered into the restraint and was given a proper opportunity to take advice before agreeing to it;
- the executive was a person of considerable business experience; and
- the executive had been provided with $1,000 per annum as consideration for the restraint of trade.
This decision illustrates that a well drafted restraint of trade clause can be enforced against an employee where there is a genuine proprietary interest to protect, and the restraint is reasonable in the circumstances.
Authors
Carl Blake
Senior Associate - Dispute Resolution
DDI: +64 9 977 5163
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Katherine Burson
Senior Associate - Employment
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Lucy Jenkins
Senior Associate - Employment
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In This Article:
In Peninsular Real Estate Ltd v Harris, the High Court set out guidelines on the ability of a departing employee to compete with his or her former employer.
