A primary concern for all businesses is the risk of losing valuable trade secrets, company information and, of course, customers when its employees go to work for a competitor or set up a business in competition. While a business can’t stop its customers from choosing who they deal with, several things can be done to protect the business from the dangers of departing employees.
Restraint of trade
A restraint of trade clause is now a standard inclusion in most employment contracts. It attempts to stop or restrict a former employee from using any confidential information, trade secrets or relationships they have developed while employed for one business at a competing business. However, quite often these clauses are unenforceable either because they are poorly drafted, too broad, or are not updated to reflect the changing role of the employee. A restraint of trade clause will be enforceable if it is considered reasonably necessary to protect the legitimate interests of the business. So what can you do to make sure the restraint of trade clause in your employment contracts is enforceable?
- Not all employees have access to the type of information that needs protecting. So make sure you assess each role individually and determine if a restraint clause is necessary in the first place.
- If you put a restraint period in place, make sure it’s reasonable given the role of the employee and the type of information to which they have access. For example, if a member of your sales team were to join a competitor, how long would it take you to hire someone to fill the role, learn the business and start to develop relationships with your customers? It will depend on your industry and business practices. For some businesses, a three-month period may be sufficient while others may require six or nine months.
- The restraint needs to cover the activities that the employee is currently undertaking. Having a broad restraint would be considered too broad, so for the above example, you will need the restraint to be restricted to a sales or sales management role with a competitor.
- Restraints can also be limited to geographical areas, so ensure that this covers the various locations needed to protect your business. It could be a suburb or town, city, state, country or even the world, depending on your business and the role the employee holds.
- You need to review your restraint of trade clauses regularly and keep them updated. Every time an employee’s role changes is a good opportunity to review their contract and the restraint of trade clause. If you don’t review the clause, you may find that the employees that could potentially cause the most damage to the business are the ones with the outdated and unenforceable restraint of trade clauses. For example, an employee who has been with the business for a long time and risen to a management role could start their own business in direct competition.
Another critical tool to help protect the business is a confidentiality clause in place for all employees (in the employment contract), consultants and business partners. To protect company information as confidential it:
- Must not be publically available;
- Must be valuable and sensitive to the business;
- Not be readily accessed or replicated by a competitor; and
- The business must have taken steps to protect the confidential information. For example employees with access to the information must be notified of the confidential nature of the information.
Some exmaples of information typically considered confidential and hence protected under a confidentiality clause include customer lists, price lists and discount structures, sales and marketing plans, terms of business, and information about new product developments. To protect its confidential information, a business should take active steps to ensure that not only do employees know that information is confidential, but they also understand their obligations as employees in dealing with the information both while they are an employee and once they leave the business.
Once any employee informs you of his or her intention to leave, it is also important to have a procedure for dealing with departing employees. An exit interview can be a useful tool for ensuring that the business has collected all of its property from the employee, such as computers, phones, documents and keys. It is also an excellent opportunity to remind employees of their continuing obligations of confidentiality. If a departing employee has any BYO devices, it is important to remove all business programs and information from the device. It may also be a good idea to keep any computer, tablet, or smartphone collected from the departing employee as is, so that if an issue arises around confidential information arise, a forensic investigation can take place.
Finally, if you have any concerns about departing employees working for a competitor or using your confidential information to set up a competing business, it is important to act quickly to prevent damage occurring, as once you have lost a customer, or your confidential information becomes publically available, the damage has already been done. If you want any further information on this topic, need assistance in drafting or reviewing you employment contracts, or have an issue with a departing or previous employee LegalVison would be happy to assist.