Protecting your business from ex-employees

The relationship you have with your employees is a little like your personal relationships; it is all sunshine and roses at the beginning, but things may happen over the course of that relationship that can cause the relationship to fall apart, and your business may be damaged by the actions of your employee during and after their employment.

One of the biggest challenges businesses face from departing employees is the loss of intellectual property, confidential information and valuable client relationships. Particularly in service industries, where relationships form between clients and the people they most directly deal with, it should be no surprise that the client’s loyalty will attach to your employee rather than your business.

Protecting your business interests

Restraint of trade clauses are often found in employment agreements to protect business interests, generally falling into one of the following categories:

• Non-competition: to prevent a former employee from competing against the company, including accepting an approach from a former client of the company;
• Non-solicitation: to prevent them from approaching the employer’s clients;
• Non recruitment: to prevent the former employee from recruiting other employees from the company; and
• Confidentiality: to protect confidential information and trade secrets.

A restraint of trade clause in your employment contract will make it clear to your employee that a condition of them taking a job with you is that they will be prevented from engaging in competition with you for a specific time and within a defined area, during their employment and after they cease working for you. It will be their obligation to not breach their contractual obligations, which may mean that they must refuse to take on clients they know to be clients of your business, even if/when the employee (at that time, an “ex-employee”) is approached by the client. The restraints cannot last indefinitely but they can give you a reasonable period of time to secure your business relationships and reduce the risk of clients moving to your ex-employees.

On the face of it, a client is free to take their business where they like (subject to any commercial supply contracts in force). However, if your clients are enticed away by one of your employees or accept an approach from that employee, contrary to a restraint of trade, that enticement will still be in breach of the restraint.

Employment contracts can be your ‘best friend’ when you are trying to protect your business interests. A professionally drafted contract that meets the needs of your business will help to secure your assets and reduce the costs of a dispute. However, employment contracts are considered in a different way to commercial contracts, so it is best they are drafted by an employment lawyer, to ensure the restraints you include are effective.

If the confidential information your employees can access is particularly valuable, you may be advised to use a Confidentiality and Restraint Deed, which provides more certainty about protection of your confidential information and business assets. The benefit of a Confidentiality and Restraint Deed is that it will explicitly give you a right to sue on that document, if an employee breaches their obligations, and reduce some of the unnecessary argument associated with the obligations in an employment agreement.

It is generally accepted that employers can enforce restraint of trade clauses to protect their legitimate business interests. However, what is a ‘legitimate interest’ is the commonly contentious point that can only be determined by the Courts if the parties to the contract dispute the provisions.

Unfortunately, we do not always get to have this conversation with business owners until after they become aware that an ex-employee has ‘taken’ clients away. If the business owner has not had a good contract in place or a Confidentiality and Restraint Deed, they will be left to pursue their rights under the common law, equity and legislation, which can be costly and time consuming.

Common law and equity

It is generally accepted that employees owe their employers obligations under the common law and equity, particularly to address cases where an ex-employee has poached their employer's client base.

The courts have intervened to prevent instances where employees have deliberately set about recruiting new clients for their own benefit rather than for the benefit of their employer before leaving their employment.

More commonly though, employers incur loss when their ex-employees take confidential information and trade secrets of the employers – however such action is clearly in breach of terms implied into the employment relationship at common law and in equity,[1]of exhibiting fidelity and good faith to their employer.[2]

The extent to which those obligations are implied and apply, and the scope of possible fiduciary duties owed by the employee can depend on the position of the employee and/or the tasks the employee has been expressly or impliedly required to undertake as an employee.[3]

Corporations Act

Section 183 of the Corporations Act 2001 (Cth) (Corporations Act) also provides an enduring duty on employees of a corporation to refrain from using information they have obtained from their employment, to enrich themselves or others, or cause damage to the corporation by improperly using that information. A breach of that section can result in a civil penalty, currently up to $200,000, and a court order for compensation to the employer for damage it has suffered by the employee’s breach of s183.

Section 184 (3) of the Corporations Act establishes that it is a criminal offence for an employee to dishonestly use information gained from a corporation they work for, to intentionally or recklessly gain an advantage for themselves or someone else. Directors and Officers of a corporation have further restrictions relating to dishonest use of their position with the corporation to gain an advantage for themselves or someone else.

The effect of these sections on employees is that they are prevented from using information gained exclusively from their employment for their own benefit or that of another party, including prospective employers. The penalties applied by the Corporations Act are in addition to any other penalties or civil remedies that may apply to a breach of an employee’s employment obligations regarding the use of confidential information.[4]

What happens if you induce your employees to breach previous obligations?

Many employers are aware of the restraints in their employment contracts, but few undertake due diligence around the post-employment restraints that may apply to potential new employees. Failure to do so may expose an organisation to significant risks, particularly in relation to employees who held a senior or managerial role within their former organisation, or who held a sales role with a high level of customer and client contact or had access to commercially sensitive trade secrets and confidential information.

As an example, organisations may find that their new star recruit is “benched” for the duration of a post-employment restraint, preventing them from undertaking their role until the expiry of the restraint period set out in the employee’s contract with their previous employer. Alternatively, an organisation may find that their new recruit cannot expand the organisation’s business in the directions for which they were hired, because they are prevented from operating in the areas they previously worked or communicating with the type of clients and customers they have experience with.

A worst-case scenario is perhaps where an organisation finds itself having to defend a claim that they induced an employee to breach their post-employment restraint or that they gained, or will gain, a tangible benefit from the employee’s breach.

If you actively induce an employee to breach their restraints from previous employment, you could face direct action from the previous employer for interference with a contractual relationship – that is, where you have procured or induced a party to a contract (i.e., the restraint to the former employer) to breach the restraint, the former employer can bring a claim for damages against you for procuring/inducing the breach.

Case law has made it clear that the wrongdoer (the new employer in that situation) does not need to know the precise details of the contract but merely to be aware of there being at least a substantial prospect of a breach – with a decision being made by the wrongdoer to proceed in any event.

The former employer may also pursue the employee for any breaches under the Corporations Act, the common law and equity. In that instance, the employee may turn to you to indemnify them for the breaches, which result in damage to the current employment relationship.

What should you do to protect your business?

To ensure that your business interests are protected if one of your employees leave

• Have a proper employment contract/ Confidentiality & Restraint Deed - it is vital that you start each employment relationship with a valid employment contract that contains restraint of trade clauses that are effective and enforceable. The duration of the restraint, as well as the geographical area, must be reasonable for the nature of the employee’s position. The clauses must be drafted carefully so that if certain parts of the clause are found to be unenforceable, the clause can be severed, and you can rely on the balance of the clause to enforce the restraint of trade.[5] The clearer and more reasonable your restraint clauses are:
  
• The less likely your employees will erroneously or accidentally breach the terms; and
• The greater chance that you can enforce the terms if they do breach them.

• Regular Review of employment contract/ Confidentiality & Restraint Deed - Your contracts should be reviewed regularly to ensure the changing nature of the employee’s current role and the changing nature of the business.
• Prospective Employee Due Diligence - Before you employ an employee of a competitor, consider what restraints may be placed on them by their current employer and what effect that may have on their usefulness to your business. Be conscious of your words and actions to ensure they could not be seen to be an inducement to breach restraints of legislated obligations and question new employee initiatives about how they may relate to their previous employment to determine if there are risks to your business.

If you believe that your employment agreement does not adequately cover your legitimate business interests, you should seek legal advice from a competent employment lawyer.

If you are concerned that your business is at risk of losing confidential or sensitive information, or clients if your employees leave your employment, check your employment contracts. If your contracts do not have restraint clauses or you think you might need better protections, we can assist you. You can contact us at 07 3160 0000 or reception@activelaw.com.au.

[1] Breen v Williams (1996) 186 CLR 71 at 113 per Gaudron and McHugh JJ quoted with approval in the joint judgment of the Court in Pilmer v The Duke Group Ltd [2001] HCA 31; (2001) 207 CLR 165 at 198 ([74]).

[2] Concut Pty Ltd v Worrell & Anor [2000] HCA 64; Amponsem v Laundy (Exhibition) Pty Ltd [2014] FCCA 2206

[3] Amponsem v Laundy (Exhibition) Pty Ltd [2014] FCCA 2206 [92].

[4] s185 Corporations Act 2001 (Cth).

[5] Schindler Lifts Australia Pty Limited v Debelak [1989] FCA 311; JQAT Pty Ltd v Storm [1987] 2 Qd R 162.