Difficult Times
We have all been reading about the credit crunch and the effect this is having on commercial activity throughout the Midlands and the country. Despite mixed messages emanating from various public and media sources, it is fair to say that the outlook is looking fairly bleak at present and this difficult trading environment is likely to continue for at least another 6 to 12 months...if not longer.
As a result, companies are looking to reduce their costs and the most expensive overhead is often the costs associated with employing people. Therefore I am not surprised by the significant increase in terminations of employment (usually through redundancies) that I have been seeing over the last couple of months.
When making people redundant employers are often only concerned with the cost savings associated with this course of action. However, they do not consider that these "redundant" employees may end up taking business from the employer by exploiting the business connections they made whilst employed with the business.
Need for Protection
An ex-employee seeking to solicit the ex-employer's customers and suppliers can mean an employer is generally unable to take any legal action unless there are post termination obligations within the ex employee's contract of employment. Without it, an ex-employee could solicit business from customers, deal with suppliers, even poach key employees from the ex-employer.
In the current economic climate, ex-employees are more likely to exploit these business connections, as they will be under substantial pressure from any new employer to start delivering new business as soon as they join. Therefore the need for protection is perhaps greater now than has been the case over the last few years.
However, even if there are post termination obligations within the contract of employment there may still be a problem with the employer relying upon them. It is not unusual for an employer to rely upon the same post termination clauses that have been in place for many years. The origin of these clauses could have been from the employer's contract of employment (when he/she was employed), from another company's contract of employment or it may even have been originally drafted by a solicitor. However, as a result of various cases that have been determined over the years these clauses may not now be enforceable even though at the time they were originally drafted the courts would have upheld them as enforceable.
What can employers do to ensure that they are protected against ex employees? Firstly, review the employment contracts to ensure that the key employees who could pose a risk of damaging the employer's business have post termination obligations in place. If there is no such provision this should be addressed as soon as possible. If there are clauses in the contract the employer will still need to ensure they are enforceable.
Ensuring Post Termination Clauses are Enforceable
Employers need to identify whether there is a legitimate business interest that needs to be protected as without this it would be very difficult to rely upon any post termination clause. In some cases this will be obvious, such as a sales executive in a recruitment agency who has developed close working relationships with the customers and clients of his employer.
Assuming this is the case, the employer should consider restraint clauses that go no further than is necessary to protect those business interests. The main legitimate business interests which may need protection are: customer/client connection; trade secrets; confidential information; and, stability of the workforce.
Employees have a general duty of confidentiality during employment. However, once the employment has come to an end an ex-employee is entitled to use confidential information for his/her benefit to the extent that such information has become part of his/her own general skill and knowledge. However, this will not extend to include any trade secrets. It is important to be aware that there is no general ongoing duty of confidentiality post termination of employment.
There are various ways that an employer can seek to protect some or all of the above mentioned business interests and for the purpose of this article we will look at the main post post-termination restrictions available in the UK. There is an over-riding requirement that these clauses must be reasonable in order to be enforceable.
The first of these is a non-solicitation clause. These covenants seek to protect the employer's customer connection by preventing the ex employee from soliciting the custom of the employer's clients and customers. It is advisable that the pool of customers/clients be limited to those with whom the ex employee had personal dealings within a specified (and reasonable) period before the termination date.
A non-dealing clause will prohibit the ex-employee from dealing with clients and customers and is considered more onerous that a non-solicitation clause. Unlike a non- solicitation clause there is no requirement to prove the ex-employee solicited or attempted to solicit the custom of the client as the restriction actually prevents him/her from dealing with the customer/client. Normally, a non-dealing clause will be used alongside a non-solicitation clause.
Where an employer wishes to restrict or limit the ability of the ex employee to go into competition, they will rely upon a non-competition clause. This will prevent the ex-employee from engaging in a competitive activity to that of the employer. Such a clause should identify the actual activity that is prohibited and there is usually a geographical limit from the employer's business. However, it is important to note that this type of clause is viewed cautiously by the courts and will not be upheld if it is considered that the intention is simply to limit or restrict competition.
In order to maintain the stability of the workplace an employer can rely upon a non-poaching clause which prevents the ex employee from employing or soliciting other employees of the employer's business. It is recommended that any such clause should be limited to those employees with whom the ex employee had personal dealings during his employment and who hold a relatively senior position or have a particular expertise.
In summary, an employer who is seeking to protect its business should consider the application of post termination obligations within the contract of employment. Failure to do so will mean the employer has very little protection from key employees whose employment has come to an end. However, if an employer decides to include some or all of the above mentioned covenants it is important that careful consideration is given to the precise wording of the clauses to ensure that they can be enforced if it becomes necessary.
Assuming the post termination obligations are enforceable against the employee, this puts the employer in a very strong position when dealing with ex employees who are in breach (or are considering a breach) of these obligations. Usually strongly worded letters to the ex employee and his new employer will prevent any breach (or stop any ongoing breach). However, in the event that it does not, the employer could consider injunctive relief (to prevent any further breach from occurring) and/or legal proceedings (for damages and/or to account to the ex employer for any profit) against the ex employee and his new employer. This process can be expensive (especially injunctive relief) but the majority of these costs would normally be recoverable from the other side if such action was successful.
For more advice this or any other employment related matter, please contact Dean Parnell
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