Protecting your business against departing employees: a key area of concern for employers

By Claire O’Sullivan, Associate, Kirwan Mc Keown James Solicitors, 22 Kildare Street, Dublin 2

An integral part of any business is the staff, in particular, what could be termed “key staff” that drive the business forward and have personal relationships with customers. The loss of staff can have a hugely detrimental impact on a business. It is not uncommon for key members of staff to leave a business and to take with them entire teams and move to a competitor or set up in competition with their former employers. An issue that frequently arises for employers is how to protect their business against employees who leave a role and seek to move to a competitor or set up in competition with their previous employer.

As an employer you invest huge amounts of time and money training employees and cultivating the necessary skills and know how in employees to grow your business and foster customer satisfaction. It is essential that you ensure that employees’ contracts are drafted in such a way that prevents employees, insofar as possible, using the expertise and knowledge gained within the organisation to the detriment of your business.

In order to protect your business you must ensure that your employment contracts contain the appropriate restrictive covenants. Unfortunately there is no one size fits all way of doing this and there is no straight forward answer to what restrictive covenants will or won’t be upheld in the event that the matter proceeds to litigation.

It is essential that you give time and consideration to the restrictive covenants that are appropriate for each individual employment contract that you enter into, what is suitable for someone fulfilling an administrative role will not be suitable for a high level member of staff that has direct contact with clients and has fostered a relationship of trust with those clients.

WHAT ARE RESTRICTIVE COVENANTS?

Restrictive Covenants are covenants in employment contracts that restrict or deter an employee from freely exercising their trade, profession or calling. In general restrictive covenants fall into two categories as follows:

-        Non-compete clauses; and

-        Non-solicitation clauses.

A non-compete clause prohibits a former employee from working in a competing business or setting up a competing business for a specific period of time within a specifically defined territory following termination of employment. Territorial and time limits must be placed on the restrictive covenant in order for the clause to be valid and enforceable.

A non- solicitation clause may prohibit the former employee from soliciting the former employer’s employees or customers and/or from dealing with the former employer’s customers for a particular length of time. Non-solicit clauses must also be confined to those clients and prospective clients/employees with whom the former employee engaged with / had influence over. Furthermore, the non-solicit clause can only prevent soliciting customers for the provision of goods / services that is in competition with the business of the former employer

The general approach to restrictive covenants is that the narrower the restriction the more likely it is that the covenant will be capable of binding the employee. For example, if the period of the non-compete clause is for a period of 6 months and confined to a particular county as opposed to the entire country than this clause is more likely to be upheld than a clause which prohibits a former employee from working in a competing business for a period of 12 months anywhere in the country.

In the case of a non-solicit clause if such a clause prevents the former employee from engaging with any customers of the former employer for the past 10 years this could be deemed unreasonable. In particular in circumstances where these customers no longer engage in business with the employer and/or the former employee was never in contact with these customers.

A restrictive covenant must satisfy the below requirements:-

1.     That it has a legitimate interest deserving protection.

2.     That the covenant is reasonable between the parties.

WHAT IS A LEGITIMATE INTEREST AND WHAT IS DEEMED “REASONABLE”?

In essence a non-compete clause must not exceed what is necessary to protect the employer’s client base and business interests.

The below are examples of what are considered the type of legitimate interests that an employer is entitled to protect:-

-        Goodwill;

-        Confidential information;

-        Intellectual Property; and

-        Continuity of employees.

Having regard to the resources expended on these legitimate interests and the fact that the business will fail without them the employer has a right to protect these interests. However, the manner in which the employer seeks to protect these interests must be reasonable and not be deemed to go beyond the scope of what is necessary.

In looking to the issue of “reasonableness” this will depend on the particular facts in each case. The reasonableness of the restricted period, location and subject matter can vary widely. The circumstances of each case will be determined in light of the legitimate interest to be protected.

It is advisable to draft your restrictive covenants extremely carefully and to seek legal advice on this matter to ensure that the interest is to be protected is defined carefully and the clause is properly drafted as this is particular to your industry and each role and individual within your organisation.

WHAT ELSE SHOULD YOU BE DOING TO PROTECT YOUR BUSINESS?

While you are concerned with the day to day running of the business it is difficult to set aside time to address matters that do not appear to be of immediate necessity. It is usually the case that the employer is the last person to know that an employee is leaving the business. There are some practical measures that should be implemented in your organisation to ensure that you are aware of employees that may be considering a move.

A strong IT policy is something that should be contained in all of your employees’ contracts if they use the office IT systems. The right to monitor an employees’ use of the system should be expressly provided for in the employment contract. It is also advisable that certain safeguards should be incorporated into your IT system such as restrictions on access to complete client lists and contact details. Furthermore it is advisable that your system sends notifications to you if employees carry out certain functions on their IT system such as saving large amounts information on external drives, printing certain confidential information, increased access to confidential information etc. These types of IT system checks should be discussed with your IT provider and a system that is appropriate for your organisation should be designed. In addition to the above you, as an employer should have regular staff reviews / appraisals to foster an environment of communication with staff.

In circumstances where an employee decides to terminate their contract it is important to consider whether it is appropriate for this person to remain in the organisation and work out their notice or if the employee should be placed on, for example, garden leave. This means an employee no longer attends work and is paid their salary for the duration of the notice period. The benefit of this action is that the employee no longer has access to confidential information in the office but remains an employee therefore cannot take up employment with anyone else.

Another option is to remove the employee from the business immediately and terminate their contract with immediate effect. In order to do this you must have a “payment in lieu of notice clause” in the employment contract, this allows you to waive the notice period, terminate the employment contract and pay the employee for their notice period.

It is also advisable that you ask the employee to return all company property such as laptops, phones, promotional material and any other form of confidential information held by them and seek their acknowledgement in writing that they have returned all company property.

While implementing stronger IT controls and letting staff off on garden leave may seem like costly measures to take, these actions may ultimately protect your business and your client base and protect your business against the legitimate threat posed by departing employees.

JUDGE UPHOLDS 12 MONTH RESTRAINT OF TRADE IN BROKER CASE

Typically the courts favour the employees’ right to earn a living over the former employers’ right to protect their business however some recent case law offers some comfort for employers in the insurance broker industry.

An employee who had worked for a broker for a 12 month period resigned from a brokerage on hearing of possible redundancies. The former employee commenced working for a competitor almost immediately, his contract with his former employer contained a restrictive covenant which prevented the employee from soliciting business from his former employer for a period of 12 months following termination of employment. The former employer issued injunctive proceedings seeking to enforce this restrictive covenant. It was accepted by the court that the former employer would need time to let other members of staff build a relationship with the clients that their former employee dealt with. The main issue in dispute was whether the 12 month period was reasonable in this case. The Judge held that it was reasonable for the former employer to seek to protect their client connections for a period of 12 months. In reaching this decision the judge had particular regard to the fact that the time for making connections with clients was at the time of and leading up to the renewal dates for insurance contracts, most of which are renewed annually. This 12 month period will not necessarily hold up in other businesses and each case will be considered on its own merits however it is very useful to have this precedent to reply on going forward.

This decision indicates that the courts are becoming more aware of the harm that a business suffers when employment contracts are terminated for whatever reason and show a willingness to look into particular businesses and the manner in which they operate when reaching decisions.

For further advice on the issues raised above please contact Claire O’Sullivan at claire.osullivan@kmj.ie  orAnne Marie James at annemarie.james@kmj.ie