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Employees on the move can become a danger from within if the exit process is not handled with care – here are five things to keep in mind, especially if they are going to join a competing business.
The ability of employees to leave their employer’s service to join or to set up a competing business can give rise to significant commercial challenges and threats.
Here are key steps that ought to be taken, both proactively and reactively, to adequately protect your business from departing employees.
1. Avoid breaching the contract of employment
Employers who breach employees’ contracts of employment, even inadvertently, may not enforce their employees’ obligations. Contractual notice provisions must therefore be honoured and contractual policies must be followed.
2. Garden leave
Placing employees on garden leave, where it has been provided for contractually, can be a very useful stop-gap measure to protect employers’ business interests by removing employees’ access to sensitive commercial information, the workforce and key third-party relationships, whilst continuing to benefit from employees being bound by their implied contractual duty of fidelity.
Having said that, in Hong Kong, it is possible for employees to make a payment in lieu to terminate their employment during or before a garden leave period.
In Hong Kong, it is possible for employees to make a payment in lieu to terminate their employment during or before a garden leave period.
3. Fiduciary duties
Directors and senior employees should be reminded that if they take preparatory steps to compete with their employers’ businesses, this would breach their fiduciary duties solely to act in their employer’s best interests.
4. Data privacy
Employers must comply with data protection legislation when conducting IT monitoring investigations and handling departing employees’ personal data in order to minimise the risk of violating data privacy laws.
5. Restrictive covenants
Post-termination restrictive covenants, such as non-competes and non-solicits, are generally void on public policy grounds but can be enforceable if drafted to the effect of only protecting former employers’ legitimate business interests and are reasonable to the interests of both parties and the public.
In this case, legitimate business interests include protecting relationships and prospective relationships with customers and suppliers, workforce stability and confidential information including trade secrets.
Drafting the covenants
Employers should consider the following tips when drafting restrictive covenants:
- Appropriateness – impose restrictions on appropriate employees only;
- Preambles – detail all business interests upon which you may seek to rely on a non-exhaustive basis;
- Duration – minimise duration periods as unduly long ones will be unenforceable and hence, valueless;
- Geographic scope – minimise geographic scope or explain why a geographic restriction would be inappropriate;
- Consideration – value must be given to the employee in return for the restrictions;
- Blue pencil – be aware that the courts will not rewrite any unenforceable parts though they may be prepared to delete them; and
- Separate – separate restrictions to increase the scope for severability if necessary.
Employers who suspect that departing employees are about to damage their business will be in a stronger position to enforce applicable restrictions if they collect evidence of wrongdoing.
Employers who suspect that departing employees are damaging or are about to damage their business will be in a stronger position to enforce applicable restrictions (such as confidentiality and post-termination restrictive covenants) if they collect evidence of wrongdoing.
It is generally difficult for employers to obtain court orders, in particular injunctions, to protect their businesses but the following tips will provide helpful tools to achieve the best overall outcome:
1. Act quickly – limit the opportunity for damage and enhance the chances of recovering evidence. Any delay in taking legal action would have a negative impact on the enforceability of the restrictions.
2. Legal advice – take legal advice early on in the process.
3. Identify and preserve – identify and document the preservation of sources of evidence as early as possible. This could be straightforward as it simply involves taking possession of the employees machine and/or devices prior to seeking expert advice.
4. No ‘sneak peaks’ – rely on forensic IT experts (rather than your internal IT) to collect, handle and analyse the electronic evidence to avoid compromising metadata by switching on the machine.
5. Moral high ground – establish the moral high ground by always acting reasonably and lawfully.
6. Precedent risk – consider that the outcome of a court case may set a precedent for other staff and will hence be a double-edged sword.
7. Damages – if damages are sought, need to collect and show evidence to prove the financial loss although, in appropriate cases, account of profits and restitutionary damages could be sought.
8. Notify competitors – put competitors on notice that they risk liability for economic torts.
Employers never know when a valuable employee might leave their business.
Early contingency planning, coupled with robust contractual protections and proactive IT investigatory measures, that are regularly reviewed and updated in light of legal and technological developments, will provide the most effective means of protecting employers’ business interests from the risks inherently attached to departing employees.
This column was authored by Melvin Sng (partner and Asia head of litigation and arbitration, Linklaters), Laure de Panafieu (counsel and Asia head of employment and incentives, Linklaters), Winnie Ng (head of employment and incentives, Hong Kong, Linklaters), and Davin Teo (director at Alvarez & Marsal).