Businesses who want to ensure the obligation of confidentiality remains when an employee is in the process of leaving the company, will need restrictive covenants and confidentiality clauses implemented into their employment contracts.
Employers inevitably place considerable trust in senior employees when it comes to accessing and using confidential information owned by the business. To gain some measure of protection in the event of a senior employee leaving, employers should manage that confidential information through the use of confidentiality clauses and restrictive covenants in employment contracts.
Employers should take care to ensure that confidentiality clauses and restrictive covenants are carefully drafted if they are to be enforceable. Furthermore, the addition of these types of clauses should not be overlooked when employees are promoted internally.
Courts have generally placed limitations on the scope of restrictive covenant clauses, particularly if they operate for periods longer than six months or seek to place other onerous, or what are seen as oppressive, restrictions on the future employment. Courts are willing to enforce restrictive covenants if an employer can demonstrate that they are reasonable and necessary to protect the legitimate interests of the employer provided they go no further than that.
The position with contractual clauses imposing obligations of confidentiality is slightly different. Confidentiality clauses are usually readily enforceable. Courts will not prevent use of any and all information – only that which the employer can prove was confidential. This may sound obvious, however, proving that any particular piece of information is confidential can be a challenging task, and impossible if there is evidence that the information has been shared, by email or other means, other businesses, or even competitors. Once the information falls into the public domain, Court will consider damages as a remedy, but not an injunction.
Employers use confidentiality clauses to prevent employees from disseminating information which may be of a private nature or which may be profitable to a competitor such as trade secrets. This is to prevent loss of business value and the competitive edge the employer’s business may have.
Restrictive covenants may be included for similar purposes to prevent employees from using company information regarding their customer base, but that is not their primary purpose. Non-solicitation clauses (aka “non-compete clauses”) are used to prevent:
In most cases, employees agree to be bound by any confidentiality clauses or restrictive covenants during contract negotiations. Express consent is normally demonstrated by the signing of the contract of employment but it is not unheard of for formalities to drift when employees are promoted internally. It is likely that if a contract of employment which contains restrictive covenants is not signed, it will not be enforceable.
FW Farnsworth and another v Lacy (2012) is an example of where an employer was complacent about protecting themselves during an employee promotion. Mr Lacy was first employed by the claimant in 2000 as a technical graduate and signed his first employment contract in 2003. In 2009 he was promoted and received a new contract of employment which he skimmed but did not sign.
The new contract contained a restrictive covenant preventing Mr Lacy from working for competing businesses and from soliciting the company’s customers for at least six months after his contract of employment ended. The 2009 contract also entitled Mr Lacy to new benefits including joining the company’s Private Medical Insurance, which he did in 2010. When Mr Lacy left the claimant company in 2012 to join a competitor, the issue arose whether Mr Lacy was bound by the restrictive covenants in his 2009 unsigned employment contract.
The court found that Mr Lacy was bound by the restrictive covenants but made it clear that this was only because he had applied for the Private Medical Insurance. Had Mr Lacy not applied for this benefit he would not have been bound by the restrictive covenants leaving the employer unprotected. The rationale for the decision is that Mr Lacy acted as if he was bound by the terms 2009 contract because he did something (obtaining the benefit of the medical insurance) to indicate that he considered himself bound by the contract.
Confidentiality clauses and restrictive covenants are one of the few options which businesses have available to protect the business against leaving employees. Employers promoting employees to senior positions should take the opportunity of including enhanced terms if they do not already exist in employment agreements when staff are promoted to more senior positions.
Senior staff and executive-level employees have heightened obligations of confidentiality to their employers due to the increased exposure to highly sensitive confidential information. These obligations should be bolstered by restrictive covenants.
Our London Solicitors provide specialist advice on employment agreements, consultancy agreements, restrictive covenants, protection of confidential information, and mitigating the new competition which leaving employees and consultants can introduce to businesses.
For business legal advice and more information on restrictive covenants and terms of employment and consultancy contracts, contact us online or call us on 020 7353 1770.
