27 September 2017

Protecting Your Business When Employees Leave – Key Considerations for In-House Lawyers

Employees may be one of the most significant assets of your business.  Inevitably, some employees will move on, and when they do they can quickly turn from an asset to a risk. In this article, we will examine how to minimize these risks.

The Contract of Employment

The duties and obligations of employees are defined by their contracts of employment.  As is so often the case, prevention is better than cure.  The best step which can be taken to minimize the risks which arise when employees leave is to ensure that the employment contract is fit for purpose.

During the time of their employment, all employees will be subject to various implied duties of fidelity (including duties not to compete, disrupt business or entice away customers and employees) and confidentiality.  However, implied duties are generally of limited assistance when employment has terminated; most will cease to apply altogether and those which may remain, such as in relation to confidentiality, may be limited in scope.

Express terms in an employment contract can be specified to apply after termination.  These most commonly take the form of post-termination restrictions, specifying what the employee cannot do after termination.  Consideration should be given as to whether contracts of employment should deal with the following termination and post-termination concerns:

  • Payment in lieu of notice. This allows the business to terminate the employment with immediate effect, paying the employee a lump sum instead of requiring them to work a notice period. The advantage of this is that the employee can be removed from the business very quickly, minimizing further contact with other employees or clients and reducing the risk of the employee taking confidential information.
  • Garden Leave. During any notice period, this may allow the business to require the employee to carry out only certain duties, or no duties at all (remaining at home).  It can also restrict the contact the employee is able to have with clients or other employees.
  • Return of business property.  This may include, for example, key fobs, USB sticks, laptops and mobile phones as well as advise of passwords and PINs used by the employee.
  • Holding Out.  Employees should be prevented from holding themselves out as having any ongoing connection with the business.
  • Confidential information.  Employees should be required not to make use of and to return or delete confidential information belonging to the business.  The definition of confidential information should be sufficiently clear and should include copies held electronically.
  • Intellectual property rights.  Employees should be required to acknowledge the business’s ownership of IP rights and take such steps as are necessarily to give effect to that ownership.
  • Social Media and Networking.  The contract can specify how the employee can use networking sites such as LinkedIn during and after employment.  This is a relatively new field which is likely to develop quickly and there may be questions as to the extent to which an employer can, for example, claim ownership of LinkedIn contact details.  However, express contractual rights will always put the employer in a stronger negotiating position than none.
  • Restrictive Covenants.  These are concerned with preventing the employee competing with the former employer in a way which would allow them what is said to be an unfair advantage.  These are discussed in more detail below.

It is important that all of these items are adequately incorporated into the contract of employment, ideally within one signed document.  A reference to obligations set out in a separate policy document may be insufficient to incorporate those obligations, or may at least give the employee scope to raise this argument and muddy the waters.

Restrictive covenants

Restrictive covenants typically prohibit former employees from some or all of the following:

  • Soliciting the business of the former employer’s customers, or enticing them away from the former employer
  • Poaching current employees away from the former employer, or employing them
  • Dealing with customers of the former employer
  • Competing with the business of the former employer

Some of these restrictions may be justifiable whilst others may not.  Prohibitions on dealing and particularly competing may be much harder to justify than a prohibition on soliciting.

Restrictive covenants can be extremely appealing to employers because they can significantly limit what a departing employee is able to do in future.  However, they are in principle inconsistent with the public policy of the Court not to restrain trade and employment.  Ultimately, the Court will support commercial competition, unless it is unfair to do so.

The starting point for the Court is therefore that a restrictive covenant in an employment contract is void as an unlawful restraint of trade unless the employer can show a legitimate interest which it is appropriate to protect (such as confidential customer details, proprietary processes or other employees) and that the protection is no more than reasonable, having regard to the interests of the parties and the public.

In determining reasonableness, the Court will look at a number of factors, including

  • how long the restrictions last for
  • how wide they are geographically – does it cover a radius of a few miles, a region, the whole of the country, or is it said to apply globally?
  • how wide it is in scope – for example, does it purport to stop the employee engaging in their profession completely, or only in certain circumstances or in respect of certain clients?

Reasonableness will be assessed at the time the covenant was entered into.  This can be a significant and underappreciated point.  Take an employee who has been at a business for 20 years, rising up through the ranks to become a successful director/employee and a valuable asset, but always subject to the same restrictive covenants entered into when the employee first joined the business at its most junior level.  Restrictive covenants which appear just about reasonable for this employee in their role as a director could well have been entirely excessive and unreasonable (and therefore unenforceable from the outset) when they started at a very low level with minimal responsibilities.

Each case will be determined on its own facts  The same restrictive covenant may be reasonable for one employee and unreasonable for another.  Where an employer employs a large workforce in a diverse number of roles of varying importance, a one size fits all approach to restrictive covenants is unlikely to provide real protection.  For some employees, restrictive covenants may simply not be required or appropriate.

Great care must therefore be taken in drafting restrictive covenants.  The more stringent and favourable to the employer they are, the greater the risk may be that they will be held to be void.  It is not uncommon for a business to consider they have a strong case against a former employee for breaching restrictive covenants only to be told by the former employee’s solicitors in no uncertain terms, and often with accuracy, that the restrictive covenants are far too restrictive to be enforceable.  What can appear to be very strong protection can be precisely the opposite.

Regular reviews of restrictive covenants should take place, particularly where the responsibilities and importance of employees changes, such as on promotion.  External changes should also be considered.  Do restrictive covenants drafted 10 or even 5 years ago provide protection in connection with using social media accounts such as LinkedIn?  It is not firmly established whether or not restrictive covenants are entered into or modified during the course of employment rather than at the outset require separate consideration (even if contained within a deed); it is prudent in the circumstances to provide and document a specific consideration, going beyond the simple continuation of employment.

It is important to remember that restrictive covenants are contractual terms to which standard contractual principles also apply.  If the contract ends because the employer is in repudiatory breach, the employees post-termination obligations will fall away.  This is perhaps most likely to arise when the employer terminates the contract without giving the required notice, but may also arise in other circumstances.

When employees leave

When an employee gives notice to terminate their employment, the first step should be to determine what that specific employee’s contract of employment says about termination and post termination obligations. This will inform the specific action to be taken; for example, can the employee be placed on gardening leave?

The risks posed by the leaving employee should also be analysed.  What are the worst things this employee could do to damage the business? How likely is this to happen? Practical steps should then be taken to minimise these risks, such as restricting access to certain information, monitoring email correspondence (particularly to personal email accounts) or checking for details of future meetings in the calendar.  The involvement of the IT department is likely to be key.  The response should, of course, be proportionate and it would be wrong to assume all departing employees have bad motives.  However, a consideration of a worst case scenario may well be the best way to create a list of actions, from which the most appropriate can be selected.

Businesses should adopt a robust leaving process, which may include exit interviews and standard letters highlighting the post-termination obligations of the departing employee. Checklists may be a helpful way to deal with this process, providing a quick and easy way to confirm that the employee has, for example, handed over business property, log-in details and so on.  It is important that this process is followed consistently.  This will minimise the risks of overlooking a “bad” employee and will also send a clear message to existing employees.

The departing employee’s email account could be left open for a period of time in order to monitor incoming emails.  An out-of-office reply can be set up to give details of the appropriate person to contact.  Passwords used by the former employee for, for example, access to webmail facilities or online resources should be changed.

Steps to take when suspicions are raised

In the majority of cases, departing employees may not pose any risk to the business.   However, sometimes something will happen which will raise suspicion.   This may be an unusual email which has been detected (the apocryphal example of a smoking gun is a blank email sent by the employee to their personal email address to which is attached a client database or similar) or a tip-off from a loyal client of contact made by the former employee.

As soon as there is any suggestion that a former employee may have breached their restrictive covenants or other post-termination obligations, action should be taken as quickly as possible.

The business’ IT systems should be investigated for evidence suggesting premeditated steps taken by the departing employee.  This could be emailing the client list, as described above, or contacting other employees or customers to arrange meetings after the employee’s termination date.  Although the departing employee may have taken steps to delete any incriminating emails, they may be stored in a deleted items folder or on backups taken by your IT department.  Keyword searches of all mail folders may provide fruitful.  Likewise deleted text messages may be recoverable from the departing employee’s work mobile phone. Browser history can be reviewed. Depending on how sophisticated your IT system is, it may be possible to determine whether certain files have been printed out or copied to USB drives.  It may also be possible to review call logs on desk or mobile phones or software access history for unusual activity.   A forensic exercise such as this may be time consuming, and it will be a question of a proportionate response based on the risk level.  It may however be key in providing evidence which may prove of key importance.   If the risks are particularly high, it may be prudent to call in third party IT specialists to assist in your investigation.

You may also decide to discuss the departing employee’s activities with key clients, suppliers and employees.  This will of course be a balancing act.  You will not want to unsettle current employees or make them adopt a defensive position because they incorrectly believe they are under suspicion themselves.  Likewise, you will not want to alarm your key suppliers or customers or incorrectly suggest that their own confidential data may be at risk.  However, both existing employees and customers may be a key source of information, which can lead to further productive avenues for investigation.

Practical steps to take when wrongdoing is revealed

If your investigations have revealed evidence that the former employee has either taken confidential information during the course of their employment or acted in breach of their restrictive covenants, there are a number of further steps which may be appropriate.

  • Your insurer or insurance broker should be advised of the discovery.  There may be strict time limits for notification to ensure cover in respect of any liability which may arise to third parties (from, for example, loss of personal data) as well as cover for legal fees for any action taken against the former employee and any parties assisting them.
  • It may also be prudent to instruct specialist solicitors to assist in action against the former employee; quick and decisive action may mean that Court proceedings can be avoided.
  • If there has been an authorised use of data, it may be necessary to notify the Information Commissioners Office.  Your business’s data controller should be involved in this process.   Depending on the nature of the business, it may also be necessary to notify other relevant regulatory bodies.
  • In some circumstances, particularly where there is evidence of theft, it may be appropriate to notify the Police.  Experience suggests that the Police may be reluctant to become involved in what may be seen as a civil matter.  However, notification may be necessary under your insurance policy.  If the Police are willing to investigate wrongdoing, their involvement may have a strong deterrent effect on the former employee (and current employees) and it will come at no cost.
  • You may choose to contact clients and suppliers to notify them of the circumstances.  The nature of the contact will of course depend on the wrongdoing of the employee.  It may be appropriate, for example, to telephone contacts to discuss the situation personally.  On the other hand, you may choose to send a circular to all contacts on your database advising that the employee has left and providing an alternative point of contact.  Generally it may be advisable to make any specific allegations against the former employee, whom you may prefer not to mention directly; the tone of any communications should be balanced and as reassuring as possible.  The purpose of such communication is to maintain the commercial relationship and minimize any disruption.

Letters before claim and undertakings

Once you have completed initial investigations and taken the steps suggested above, the next step will be to decide what action to take in relation to the former employee. This will be dictated to a large extent by the risks to your business posed by the former employees activities.  In the most urgent circumstances, there may be no real option but to commence proceedings immediately without tipping off the employee.  However, in most cases it will be appropriate to write to the former employee first of all.

Letters to the former employee should contain sufficient information to comply with the Practice Direction – Pre-Action Conduct and Protocols in the Civil Procedure Rules as far as possible, although you will want to specify a fairly short deadline for a response to be provided.  In most cases, the letter will require the employee to provide undertakings in order to avoid the need for proceedings to be issued immediately.  The undertakings may require the employee to disclose details of activity undertaken and to deliver up information and property belonging to the former employer, as well as promise to comply with existing obligations.  It is prudent to seek undertakings for two reasons.  If they are provided, they should be sufficient to prevent the former employee from engaging in further unlawful conduct (and if they are provided then breached, the former employee will be in a very difficult position if and when the matter comes before the Court).  On the other hand, if the former employee unreasonably refuses to provide undertakings, you will be able to justify seeking recourse through the Court, and will gain protection on costs.

Whilst the former employee may not accept all of the proposed undertakings, in many cases they are willing to provide some form of undertaking and it is possible to agree a compromise position. There are advantages in making compromises at this stage in order to obtain protection: provided the employee complies, it will provide some immediate protection and will certainly save the considerable costs of issuing proceedings; it will also mean that the court will not have to make a decision as to the enforceability of the restrictive covenants in the employment contract.

If the former employee refuses to provide any undertakings, or alternative undertakings proposed are not acceptable, the decision will have to be taken as to whether to issue proceedings.  If proceedings are required to enforce restrictive covenants which are limited in time, the decision to issue must be taken quickly.

Issuing proceedings and seeking an interim injunction

The usual remedies sought in Court proceedings in relation to the breach of restrictive covenants are injunctions and damages.  The injunction is generally a prohibitory order requiring the former employee (and perhaps the new employer or any other related parties) no to take certain action, such as contacting specific customers.  In some cases the injunction may be a mandatory order, requiring positive steps such as the delivery up of certain information.  Damages will compensate for losses suffered as a result of the breaches of restrictive covenants, and would be assessed as contractual damages in the usual way.

In many cases, the employees activities will pose an immediate risk to the business.  If urgent action is not taken, it may be too late.  The average claim will take more than 12 months from the date of issue to reach trial.  By this time, the harm may already have been done and the restrictive covenants may well have expired.  The question of an injunction is likely to fall away, although a damages claim may remain.

In many cases, it will therefore be appropriate to seek an interim injunction against the former employee.  Some cases may even justify an application for a search order.  An interim injunction will apply until trial, or further order of the Court.  An application for an interim injunction is usually made at the same time as issuing the underlying claim, and will be listed to be heard as soon as possible.  It may be appropriate for the initial hearing to be without notice, so the injunction is made without the former employee being involved.  In this case it will likely remain in effect only until a return hearing where the former employee will have the opportunity to set out their case.

An interim injunction is a discretionary relief.  It can impose a significant burden on the defendant (particularly for example if combined with a search order) and the consequences for the former employee in the short and long term could be life-changing.  The Court will only exercise its discretion if it is satisfied that it is “just and convenient” to do so.  If the Court is satisfied that there is a serious issue to be tried, it will go on to consider the balance of convenience, assessing the evidence available, the conduct of the parties and the effect granting the injunction would have on the various parties involved.  If the Court considers that damages would be an adequate remedy, the injunction will not normally be granted.  If the various factors are closely balanced, the Court is likely to opt to preserve the status quo.

Because an interim injunction will be awarded without the Court having tried the claim, the Court is keen to ensure that the defendant will be protected in the event it transpires that an interim injunction should not have been awarded.  Therefore it is highly unlikely that the Court will make an injunction order unless the employer provides a cross-undertaking in damages – a promise to the pay to the former employee and/or any other respondent whatever compensation the Court may order if it is held the interim injunction was wrongly ordered.  If there are concerns about the employers finances, it may be necessary to provide a parent company guarantee or make a payment into Court. It is therefore very important that the employer understands the potential liability and has the means to satisfy its undertaking if required.

In many cases, where an interim injunction is decided, it effectively settles the matter: if the former employee is prevented from contacting clients or making use of confidential information, for example, the damage done to the former employer is limited or prevented altogether. Experience suggests that in this case, the parties usually agree final terms of settlement in short order, minimising the further legal costs to be incurred.  Likewise, if the injunction application is unsuccessful, this may mean that the claim is less commercially appealing for the former employer, which may well have received an order to pay the former employee’s costs of the application.  Whilst the underlying proceedings and damages claim will remain live, the former employer may choose to cut their losses at this stage.

This article does not constitute legal advice. Specific legal advice should be taken before acting on any of the issues covered.

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About the Author
Tom Williams, Senior Associate Solicitor
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