Restrictive covenants: three steps to protect your business when a key employee leaves

Catharine Cooksley explains how to make sure your company's secrets remain safe.

All businesses, regardless of sector or size, will have key employees who are invaluable. Who are yours? Is it the dynamic salesperson with the great relationships with customers? Or the charismatic manager who is popular with his team and who gets them to deliver results?

Regardless of their role, these employees will have some things in common - detailed knowledge of your business and future plans, strong relationships with fellow employees and customers, and significant experience in your market and sector, to name a few.

What would you do if one of your stars resigned? How would it affect your business if they set up in competition with you or were poached by a competitor? The impact could be huge, especially if the very attributes you value are used against you to benefit others.

All employers should be alert to this risk. By taking proactive steps during the employment relationship and acting quickly and strategically when faced with a departing employee, you can minimise the potential damage.

Step 1: Tie in your employees at the start

There is little recourse in common law to restrict an employee's actions once they leave. The onus is, therefore, on the employer to put in place the requisite protection, and the time to do this is at the recruitment stage.

When negotiating the contract of employment or other terms of engagement with your recruit, be sure to include relevant restrictions to curtail their activities both during and after employment. If the employee then breaches these restrictions, you have the option of taking legal action to enforce them.

However, restrictions will only be enforceable if they are reasonable, and what is reasonable will vary from business to business and from employee to employee. Avoid an overly ambitious approach, because irrelevant or particularly restrictive provisions could weaken an otherwise strong claim.

To identify the appropriate restrictions, consider the employee's role in the context of your company and how they could damage your business should they leave the organisation. For example:

• Will the employee have access to confidential information or intellectual property?
• Would their departure affect relationships with key customers, suppliers and prospects?
• Would others follow the employee to a new employer?

Common restrictions

Protection while in employment

Control of activities It may be reasonable to require the employee to devote all their time to the business and not have any outside interests, or at least not any work-related competing interests.

Confidential information You can protect far more during employment and can require employees to maintain confidentiality with regards to trade secrets and sensitive information about the business, such as customer lists, business plans and details of financial performance. However, you cannot prevent them from using information that belongs to them, such as their own knowhow and skills, or information that is publicly available.

Social media The case law is still developing, but one recent case held that Twitter "followers" and account details could be the employer's property. If corporate social media is important, ensure the contract is clear that tweets, contacts or blogs and so on created in the course of employment belong to the business and must be delivered upon termination - subject, of course, to the terms of any relevant website, such as Facebook and LinkedIn.

When the employment ends

Confidential information Once an employee has left, only "trade secrets" (ie the most highly confidential information) will be protected from disclosure at common law. To protect confidential information that falls short of being a trade secret, you need to include wording in the contract to prohibit the employee from disclosing this information once they have left. Do not draw this definition too widely or include information that is generally available, or the clause may not be enforceable.

Termination provisions Think about the notice provisions that you include:

• A garden leave clause is a particularly effective means of restricting the employee's activities; it allows you to keep them out of your business and the wider market while they sit out their notice at home rather than risk them taking their knowledge elsewhere.
• Consider including a payment in lieu of notice (PILON) clause. This allows you lawfully to terminate the contract with immediate effect provided you honour the PILON and has the advantage of keeping the restrictions intact (restrictions will usually fall away if a contract is terminated unlawfully).
• When used judiciously, post-termination restrictive covenants can prevent an employee joining a competitor, dealing with your clients and suppliers and poaching your staff (for a period of time). However, tailored drafting is a must if they are to be enforceable.

Step 2: An ongoing requirement to review

Although it is critical to put in place the contractual protection, it does not stop there. There are steps you can take throughout employment to protect your business if the employee leaves.

• Customer relationships Although you want your employee to build strong relationships with customers, this does increase the risk of customers following the employee when they leave. Regularly review how you manage your relationships to ensure that customers have more than one point of contact.
• Team structure Similar issues can arise with internal teams. Therefore, make sure that teams do not become overly reliant on one key individual to avoid the potential for a team exit en masse if that person leaves to join a competitor.
• Change in role As the employment relationship progresses, you should revisit the original contract to check that the terms still suffice. If an employee is promoted you may need to include new restrictions as part of the package.

Step 3: Think strategically and act quickly if the worst happens

If you discover that a key employee has been poached, has resigned unexpectedly, or is acting suspiciously, it is important to react quickly. However, it is equally important to consider your strategy first because emotions can run high in such situations. Be wary of knee-jerk reactions. These are seldom helpful.

• Talk to the employee If possible, discuss their future plans and reasons for leaving. This may provide an opportunity to convince the employee to stay - sometimes the employee does not want to go, but may feel undervalued or has other concerns that can or need to be addressed. Even if they do not want to stay (or if you do not want to keep them), a conversation can allow you to find out where they are going and whether your concerns are legitimate. Keep a record of what the employee says.
• Review their contract Consider what provisions there are to protect the business. Think about all relevant documents - are there restrictions in non-disclosure, partnership or shareholder agreements? If there are no helpful express terms, there may still be ways to seek protection through implied terms, for example, to protect trade secrets, database rights and other intellectual property rights, or fiduciary duties for directors or some employees with particular responsibilities.
• Investigate If you think the employee may be in breach of his restrictions or may be contemplating one, gather evidence. Talk to other staff and carry out searches of email, telephone and printing records. Check when the employee has accessed your premises and IT networks - is there unusual activity? Forensic IT specialists can conduct searches of data held on electronic devices, including files that have been deleted, overwritten or downloaded, and will know how to preserve the evidence. However, with current employees, you should only carry out such investigations if you have reason to suspect wrongdoing and should ensure searches are proportionate to the evidence you are seeking.
• Dismiss While often the immediate reaction, this may not be your best option. Once employment has ended, the employee owes fewer implied obligations and his contractual obligations may fall away if the dismissal is in breach of contract, leaving him free to compete in the jobs market straight away. If an employee has resigned, consider garden leave to keep them out of the business and away from colleagues and contacts during their notice. If you do want to dismiss immediately (and the employee has not breached their contract), check that there is a PILON to ensure restrictions are enforceable.
• Do not lose focus on your business It is easy to concentrate solely on the employee, but remember your customers; let them know who will be looking after their interests. Time spent on your customers may be more constructive than that spent pursuing the departing employee. Reassure staff that the team will continue to run smoothly and address any wider concerns the departing employee may have raised. If appropriate, issue an internal announcement and a press statement.
• Litigate It may be that legal action is the most effective way to protect your business - but this does not necessarily mean taking court action. Once you understand your options, you can decide your preferred strategy. Usually the first step is to write to the employee and any new employer notifying them of continuing contractual obligations and requesting they undertake to comply with them; often these undertakings are given and you can move on. However, further remedies, including injunctions to prevent competitive activities, are available through the courts if the employee wants to be obstructive. Beware, however: the legal costs and management time involved in seeking injunctions are high and you will want to make sure that the end justifies the means.

Losing a key employee will always be difficult. But by taking protective steps throughout the employment relationship, you can put yourself in the best position to minimise the damage, should the worst happen.

Catharine Cooksley is a senior associate at Burges Salmon LLP.