EveryMonth (July 2013): Protecting your business when a senior/key employee leaves


Our last two blogs have considered points you should consider when drawing up a contract of employment for a senior/key employee.

This month we look at the issues that can arise when one of your employees hands in their notice or has left and you are concerned that they may be acting in a way that could damage your business.

The key questions concern notice periods and the deterrent value of restrictive covenants. We also clarify your options if your employment contract does not include effective provisions to protect your confidential information and maintain your competitiveness.

We hope these pointers will be useful to you and your business.

1. Should I allow the employee to work their notice period?

This will first and foremost be a matter for your commercial judgement.  In some circumstances a person who has handed in their notice may cause discontent and disharmony. You may also be fearful that they cannot be trusted with confidential information particularly if they are to join a competitor.

If your employment contract is well drafted it will include a “garden leave clause”.  This will allow you to ask the employee to stay at home and not come in to the office.

Hopefully the contract will also include a clause allowing you to make what is called a “Payment in Lieu of Notice” otherwise known as a “PILON” or termination payment.

In the absence of a PILON you would be in breach of contract by making a termination payment even if it was a full and fair one.  This is important because a breach of contract would mean that the post-termination restrictions in your employment contract will be unenforceable.

2. I have heard that post-termination restrictions can never be enforced.  Is that right, and if so why should I bother with them?

There are several different types of post-termination restrictions which can be a very powerful deterrent in some circumstances.   Even badly drawn clauses (that would not be upheld by a Court) can also act as deterrent. Many employees will not take legal advice and even if they do they will be anxious to avoid the legal risk of enforcement action (even if they have been advised that this is a small risk.

3. What type of post-termination restrictions are enforceable?

The starting point is to be very clear on the type of restrictions that we are talking about.  The sort of restrictions least likely to be upheld are those that preclude an employee engaging in a competitive business either by themselves or through an existing competitor to your business.  This is a specific “non-compete” clause and since it means an employee cannot work in perhaps the only industry he knows the Court will regard it as a “restraint on trade”.

For such clauses to stand any chance of being enforced the duration must not be excessive.  As a rule of thumb the most a Court is likely to enforce will be the employee’s notice period (less any garden leave period).  The scope of the restriction geographically and in terms of the nature of the business precluded will also be key.

The clauses more likely to be upheld are those that protect your confidential information and those that seek to prevent customers and employees being poached by the employee. Again the duration of the prohibition and scope of business being protected will be important. So, for example, a well-drafted clause will limit protection to customers with whom your employee had direct dealings.

4. How might I be protected if the employment contract is well drafted?

In legal theory you could bring a damages claim against an employee who has breached his or her employment contact.  In practice it will be very difficult, if not impossible, to prove your loss.

So what you would need to do is bring a legal action for an injunction to prevent the employee acting unlawfully.  You would also need the action to be heard very quickly so you would be seeking an interim injunction to protect your business pending a full trial.  The Court would only award an interim injunction if you gave what is called a “cross undertaking” in damages in case the clause was, at trial (which might be a year or more away), found to be invalid.

Very often this is a game of bluff with an employee who is unlikely to appreciate these risk areas for you the employer.

One other noteworthy point is that there is a moral dimension: most people who have signed a contract expect to abide by it.  Reminding the employee of what the contract said can be very useful.

5. Do I have any rights against the new employer?

There is a legal action called a “tort” which allows you to claim against a new employer who induces a breach of contract by your employee.

It can therefore be an effective tactic to write to the new employer to put him on notice as to the terms of the employment contract.

6. What if I have no post-termination restrictions on which I can rely?

The obvious answer to this is to remedy the situation for the future.  More practically if you have evidence that an employee has acted in breach of confidence whilst employed you may have an action. For example where the person is planning to leave without serving his notice and taking your customers/employees with him.  This is particularly so with Directors who have more stringent fiduciary duties.

In some circumstances a so-called “springboard injunction” can be used to prevent a Director or senior employee who acts in gross dereliction of his duties from benefiting unlawfully from his actions.

Hints and Tips

  • If you don’t want an employee to work their notice you will need to check your employment contract for “garden leave” and PILON clauses;Be wary of making a termination payment if your contract does not include a PILON – this could make your post-termination restrictions unenforceable;
  • Even badly drafted covenants can deter exiting employees from competing with their former employer – most employees will not take legal advice;
  • The clauses most likely to be upheld in Court are those that protect your confidential information and prevent exiting employees from poaching key staff to set up a competing business;
  • Specific “non-compete” clauses to prevent an employee from working in the only industry he knows are much less likely to be upheld;
  • It is difficult to prove a damages claim against an employee who has breached their contract; taking a case to Court could take a year;
  • It is possible to take action (a tort) against a new employer who induces a breach of contract by your employee;
  • In some circumstances a “springboard action” can be used to prevent a Director or senior employee who has engaged in deliberate unlawful conduct from benefiting from their actions.