Employees at any business are usually privy to information which is integral to its success, including trade secrets and intellectual property. Upon leaving the business, that knowledge could make them an attractive asset to a competitor.
Preventative legal measures exist in the form of restrictive covenants. Stated as a clause in the employment contract, restrictive covenants can deter ex-employees from helping to strengthen a rival's knowledge. Workers who try to entice former colleagues and customers to the competition may also find such efforts thwarted by their established agreement with their former employer.
But restrictive covenants often work better on paper than in real life. Employers can be uncertain of the limitations they are entitled to place on their staff, and how to go about enforcing them. Lawyers say protecting the use of confidential information is admittedly tricky, but employers' rights may extend further than they think.
Learning the law
International law firm Freehills works with local counsel partners on employment matters in Singapore. George Cooper, its Practice Leader, Workplace Law and Advisory in Asia, says the best weapon employers can have is a good understanding of how employment law works locally. In particular, 'common' laws, binding resolutions made by judges, play an important part. In Singapore, there is virtually no statute (Parliament-made) law that impacts on this area, he says.
At first, that may seem like bad news for employers. Under the common law, all restrictive covenants are void and unenforceable because they are inconsistent with the public policy principle of allowing individuals to ply their trade in a free employment market.
However, there are some important exceptions and restrictive covenants can be deemed legitimate if certain tests are satisfied. Employers are not permitted to protect themselves from competition per se, Cooper explains. However, if they can identify a particular business interest, a restrictive covenant can be enforced. In other words, employers must establish they have something tangible to protect before their restrictive covenant is legally enforceable.
Typically, confidential information, trade connections and goodwill, and the maintenance of a stable, trained workforce are all able to be protected under common law rulings. Each of these interests has its own type of restrictive covenant clause available: 'non-competition', 'non-solicitation' and 'non-poaching' respectively.
According to Claire Gomez, Associate of international law firm ATMD Bird & Bird, restrictive covenants should be well-drafted and made clear in employment contracts. Importantly, any such clause must not overreach or be unfairly restricting on the employee or wider market. An employer must always bear in mind that a restrictive covenant must be reasonable between the parties and reasonable in the public interest, she says.
What is 'reasonable' may inspire some debate. Gomez says this will often depend on the circumstances. Generally speaking however, a restrictive covenant should only go as far as necessary to protect the organisation's interests. If it extends too far, the covenant can become 'unreasonable', and therefore void, in the eyes of the law. As such, clauses should specify the scope of the activity being restricted after employment ceases; the geographical area where the restriction should apply; and the time frame.
Employers will need to tailor each clause to the worker and position, as assessments of fairness can change quickly across different levels. For example, a covenant that prevents an employee from working for a competitor for a period of six months anywhere within Malaysia may be enforceable against a national sales director but would not be appropriate for, say, a car mechanic who only deals with people in the immediate locality.
At the beginning stages of establishing a binding agreement, employers must consider legal principles and what interests they are trying to protect. From that point they can select a type of restraint accordingly, with an appropriate and limited scope in terms of activity, area and duration. Besides general contract clauses, it is also possible to have contract clauses which establish restrictions on confidential information after employment but don't otherwise restrict the individual's activities. It's all about drafting and tailoring according to the circumstances of the case, says Cooper.
Grey areas and remedies
If a covenant is broken, there are two remedies an employer can pursue. The employer can seek an injunction. If successfully obtained, this court order can specifically demand the ex-employee stop the restricted activity.
If the damage to the business has already been done, a damages claim may be more suitable. This is a standard way of dealing with any breach of contract. Through this claim, the employer can pursue losses suffered as a result of the breach.
However, ascertaining and comprehensively proving an ex-employee's breach of contract can be a challenge. It's very difficult for employers to build and prove an evidentiary case in these matters, says Cooper. After all, what information is confidential? There is a grey area concerning the general know-how of an employee - their stock of knowledge about their job. It is difficult to draw the line as to what falls into that category and what falls into the confidential information category which can be restricted.
For example, a written customer list can be regarded as confidential information and protected under a relevant covenant. However, an individual might be aware of who the customers are, as well as potential customers in a particular industry without reference to that specific list. As it is probably publicly available, it's hard to prevent the individual from using or acting upon that information. Without the 'smoking gun' of the actual list, it's almost impossible to prove where or how the information was gained.
But the fear of a claim can be enough to steer former employees in the right direction. It is not unusual for original employers to send warning letters to former staff, reminding them of their obligation and seeking undertakings. Rival employers can also receive notice, leaving them with the possibility of direct legal action if their new staff member is encouraged to break a restricted covenant. They need to be careful but it's a strategy that's sometimes available, says Cooper. These steps may also assist in building a case for an injunction if necessary.
Other uses
Restrictive covenants don't only apply to former employees. They can be just as relevant during the ongoing employment relationship. Most work contracts, however, include only post-termination restrictive covenants on the basis that current employees have an implied obligation to confidentiality regardless. Also, employers are able to better monitor and regulate employees' actions while they are in the office, making it less critical that specific restrictions be put in place.
In all, restricted covenants can be used to protect an employers' business in several ways. They provide leverage even when an employer would rather not pursue the matter to a full court hearing or application. They can also be used as a cornerstone in termination negotiations with staff. The issues that need to be considered will vary considerably from case to case and from employee to employee, so employers are advised to seek professional guidance.
What is important is that the covenants are written and used appropriately. The covenant must have, at least on the face of it, some chance of being enforced if it is going to be taken seriously by the ex-employee or his new employer.