Handle departing employees: When the grass is greener

One of the biggest liabilities for a business is an employee who wishes to leave either to join a competing business or to set up on their own in competition. Someone who has decided to leave may have prepared long before their actual departure, for example by buying an off-the shelf company, setting up a bank account for the new business or briefing designers or suppliers.

A recent case in the Patents County Court is a good example of how an inadequate contract of employment can leave a business without a legal remedy when a key employee takes steps to set up in competition. The case involved Helmet Integrated Systems Limited (HISL), its former salesman Mitch Tunnard and, Modular Helmet Systems Limited, the company he established following his departure.

During his employment Tunnard had an idea for a new helmet, which he presented to HISL. It chose not to take it further so he decided to produce the helmets himself. He took preparatory steps prior to leaving HISL, including briefing a design company and obtaining a government grant for his new enterprise. Tunnard obtained a consultants' opinion on his idea and how best to place it in the marketplace.

Tunnard's actions were not in breach of the express terms of his contract of employment with HISL. In the absence of express clauses, an employer is forced to fall back on implied obligations or terms such as the duty of fidelity and fiduciary duties that an employee owes his employer. In reality, these duties can provide limited protection for an employer. In this case, the court decided that actual competition or misuse of confidential information belonging to the employer is necessary to show a breach of fidelity. The key is to distinguish between preparatory steps and competitive acts such as approaching suppliers or clients.

There are two lessons from the HISL case: first, listen to your employees when they have good ideas. Second, if you wish to prevent departing employees taking preparatory steps prior to leaving employment to ensure their future income, or competing with you after they have moved on, make sure your contracts of employment are properly drafted.

Protecting your business

The most appropriate method for putting protective measures in place is to ensure employees' contracts of employment contain express clauses governing the use of confidential information, creation and use of intellectual property (IP), and actions during employment and following termination.

Intellectual property

Where IP or development is a key part of a business or role, the employment contract should also provide for:

• the business to own all IP created during the course of employment - whether during work hours or not
• IP created using business equipment or resources belong to the company
• waiver of the employee's moral rights under the Copyright, Designs and Patents Act 1988
• the rights and obligations relating to IP continue in force after the termination of employment and are binding on the employee's personal representatives.

If development is a key part of an employee's job, it is advisable to have a detailed job description annexed to the contract as evidence of activities which will be done 'in the course of employment'.

Restrictive covenants

The usual method for trying to prevent competition following termination is by including restrictive covenants in contracts of employment, covering solicitation of clients or employees, dealing with clients, moving to a competitor organisation, or setting up in competition.

These restrictions need to be carefully drafted to enable the employer to rely on them. The employer must be able to show the restriction is designed to protect a legitimate business interest, meaning a proprietary interest such as trade connections, goodwill, maintenance of a stable workforce and confidential information. The restriction must only go so far as necessary to protect the interest, be reasonable in scope (ie duration and geographical area) and should only cover clients or suppliers with whom the employee dealt or the poaching of senior employees or employees for whom they had managerial responsibility. As far as possible, restrictions must be tailored to the employee's individual role, and it is possible to name competitors in the restrictions for whom the employee is prevented from working following termination.

Skill and know how

As a matter of public policy, an employer cannot prevent an ex-employee using the skill and knowledge or 'know how' which the employee acquired during the normal course of their employment. However, an employer can prevent the use of specific information belonging to it, if the employee would receive an unfair competitive advantage from its use.

With regard to confidentiality, in the absence of an express clause, the fall back position provides limited protection for the employer, as only information classed as a trade secret will be regarded as confidential. An express clause can identify other types of information as confidential and if, in practice, this information is treated as confidential, eg access is restricted and the information is marked 'confidential,' then it is likely that an employee will not be allowed to use this information post termination.

Practical difficulties

The greatest problem in enforcing a restriction post termination is the need to obtain evidence of the employee's breaches from valued clients and customers that the employee has tried to solicit their business or deal with them. Most businesses are reluctant to involve their clients in litigation and often clients, although initially willing to alert the business to the employee's activities, are extremely reluctant to become involved in any proceedings as witnesses to the alleged breaches.

One difficulty for an employee is that litigation is extremely expensive and could potentially bankrupt a start-up business. If the employee has moved to a competitor, their new employer could be joined to any proceedings on the basis that it encouraged or induced the employee's breach of contract.

Garden leave

The most effective method for preventing competitive activity is to put an employee on garden leave during their notice period - the contract continues in full force but the employee is not required to attend work. However, this can be expensive as the employee is still entitled to be paid. It also requires an express contractual clause. Any breach of the implied duty of fidelity or of express clauses in the employment contract would then be a disciplinary matter, a case of gross misconduct if sufficiently serious or the basis of a claim for damages against the employee.

Sara Khoja is an employment lawyer at Field Fisher Waterhouse

For more on restrictive covenants, click here

What an IP policy should contain

Documents to be reviewed

• Contracts of employment - in particular any restrictive covenants, confidentiality agreements or intellectual property provisions.
• Employee handbooks - codes of conduct and activities during work hours.
• Monthly revenue figures for employees in a sales capacity to ensure there is no unexplained dip in figures, indicating that the employee is not devoting their full time and attention to the business.

Key points

• Contracts of employment should be reviewed every one to two years to take legal developments into account.
• Breach of contract by an employer will invalidate the restrictions, eg failure to pay an employee their full notice pay. So an employer wishing to enforce restrictions should be careful not to breach an employee's contract, and pay all contractual entitlements on termination.
• In the absence of express clauses in the contract of employment, an employer has to fall back on implied clauses such as the duty of fidelity, duty of loyalty, and fiduciary duties. These provide limited protection.
• Industry workings and practice will be relevant to determine whether or not a restrictive covenant is reasonable or not in terms of its scope and the interest it seeks to protect.

Express contractual terms

Express clauses in an employment contract should provide that:

• the employee devote the whole of their attention and working time to the employer.
• the employee is prevented from holding any interest in any other business or competing business during employment.
• the definition of confidential information covers all key company information and prevents employees using this information following termination.