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When an employee joins the competitors across the road - especially if he/she is privy to confidential information - the organisation loses more than just an employee: it also runs the risk of losing both company and trade secrets. This is because, more often than not, employers fail to differentiate between its intellectual property and an employee's own expertise or domain knowledge. The dividing line, employers admit, is very thin, making it even more difficult for employers to either take up a case against their former lieutenant, or count their losses and move on.
Understandably, in a bid to safeguard themselves, some resort to weaving restrictive covenants into their employment contracts, and letting their employees know even before joining the company where the line is drawn. Others, however, believe that this exercise in legal callisthenics is nothing more than that - and, in reality, does very little to bar an employee from misappropriating a company's opportunity or trade secret - except, perhaps, allow HR to sleep more peaceably at night, cocooned in a false sense of security.
Sense & sensibility
Interestingly, what complicates the equation even further is the fact that more often than not, covenants simply make little or 'no sense' at all. For instance, 'if you are in a defence production company and it is a matter of national security, you can't go and join another country's defence sector,' Arvind Agarwalla, CEO, FACT Software International, shares. Here, he admits, barring an employee from joining a similar organisation is logical. But apply this concept to the commercial world in general, and the IT industry in particular, and it becomes irrelevant. 'There can be a covenant that someone who works with one company cannot work in a similar company with a similar product for the next 24 months (during the 'lifespan' of that technology). But hey, he's worked with me for five years, that's the only thing he knows best, that's the only domain knowledge he knows about and if you expect him not to join a similar company, what is he doing to do? Will he be a gardener, will he be a plumber?' he asks.
The law & more
Therefore, it is important to ensure that restrictive covenants are no wider than is necessary to protect company interests. 'Typically, the restrictive covenants should specify and limit the competing activity, impose a reasonable duration of the restraint and geographical area. Each case differs depending on the nature of the employee's duties, seniority and contact with the employer's customers. It will be prudent not to impose the same restraints for different level of employees as the court will only regard the employer's intentions as one to prohibit competition rather than to protect legitimate interests,' See Tow Soo Ling, partner, Colin Ng and Partners, shares.
Beyond that, 'restrictive covenants are enforceable against the employee, provided that the employer is able to satisfy the court that there are legitimate interests of the employer to be protected,' she adds. In other words, if the employee chooses to contest the legal validity of such a covenant, the onus is on the employer to establish that it is justifiable.
As a result, a good grasp of the nature of the business, the implications of a possible breach of such covenants, and appropriate legal support are essential. 'If the organisation decides to put such a clause in place, it's important that the management and HR take it seriously, especially when there's a case of breach. Or else, the rest of employees may conclude that the company is not serious about the covenants and take matters lightly,' Aileen Tan, VP - HR, Asia-Pacific, Invensys Process Systems, cautions.
Reasonable restraints
However, enforcing the covenants is often a mammoth task, Rohit Zutshi, senior HR advisor, BP Singapore, indicates. 'It is very difficult to enforce restrictive covenants legally in most cases,' he admits, as it is 'long-drawn, time-consuming and very expensive', FACT's Agarwalla adds, especially when, 'legal view on this matter is very fuzzy and not crystallised yet.'
Thus, HR experts fear that employees who sign employment contracts with restrictive covenants may soon discover the fallacies and work around the loopholes. 'Some employees are 'quite smart, legally savvy and know their rights. If they see that there are loopholes within the clause (i.e., the clause is loosely crafted), they know that the employer can't do much with them even if they join competitors. So they simply sign, ignore and be arrogant about it,' Invensys' Tan points out.
To effectively handle such a situation, HR therefore needs to know its 'rights'. 'We should not craft very broad restrictive language in employment contracts as they tend not to hold well in court. We need to be reasonable in the scope of restraints, which primarily should focus on protecting the interest of the company and be clear with regards to the duration of restraint, territorial and scope of business interest to be protected.'
Protecting the company's interests
In other words, covenants should not be used to threaten employees into legal compliance, but are meant to 'protect the interest of the stakeholders - customers, existing staff, suppliers, business partners and associates, shareholders and the management,' Dr Theresa Chew-Tan, president and CEO, Expressions International, tells us.
Her firm, for example, is one that abides religiously by their restrictive covenants. Signed prior to their employment, together with their official employment contract, a condition of employment across the board is that they are not allowed 'to share trade secrets or confidential business information from his/her previous employment upon joining a new organisation. The employee is also not allowed to engage in activities in similar competition as the previous employee within a determined period as restricted by RC depending on each individual organisation policy.'
In addition, once an employee ceases his/her employment with Expressions, the management 'reminds the outgoing employee, as well as the existing employees, about the terms under the Restrictive Covenants (RC) and the consequences if the RC is violated.' To reinforce the message, 'we will not hesitate to enforce any legal actions against any existing or former employee if the RC is violated, especially when they bring all their existing clients to new employer as it is detrimental to the company's business,' she emphasises.
In the real world
FACT's Agarwalla, on the other hand, bows to reality. 'Some people would take data away, some people would steal data, but show me a foolproof way of actually protecting your data. There's none. There's also very little you can do to cover the trail. But whether the trail is there or not, it is very difficult to go and chase someone. So we believe that if you have a product that is world class, if you have a service backing up the product that is world class, the value proposition to the customer is immense. Then no amount of data stealing can really go and harm the company because no one can replicate the entire model,' he says.
This mentality, he admits, is a rarity for Singapore, where 'people go by the book more often than they need to' and highlights 'that is where this whole issue kind of comes up'.
Instead, he feels that if employees are treated with respect and empowered, many of these problems will cease to exist. 'It is not that one shouldn't have documentation. We'll have to have documentation. But it is more important to work with people and to understand what makes a person tick. All successful organisations are very people-oriented. I don't think a human being reacts very well to written words all the time.'
BP's Zutshi agrees. 'We look at alternate ways like rewards, benefits, job, careers, and so on, as means to have a healthy relationship with employees during their employment or after they have left us.'
Striking a balance
Indeed, while many employers still adhere to the legal clauses, many others have begun to look beyond conventions and precedents, opting to strike a balance between rigidity and flexibility for a win-win situation.
'As an employer, we must be seen as fair and respect that employees do have right to earn a living. Hence, if employees are upfront about their intent to pursue an interest that could possibly breach the covenants, it is important to allow them to seek permission to do so, and if the employee could justify that his new interest will not have an adverse impact on the legitimate interest of the employer, as an employer, I do not think we can unreasonably withhold our consent.' Invensys' Tan notes. FACT's Agarwalla agrees, and adds, 'I personally believe it is a two-way street. You really can't restrict anyone with a covenant. If a person wants to do something which he is not supposed to do, the person will go ahead and do it. But if you inculcate a culture of trust and respect, clauses will become irrelevant.' HRM