When an employee leaves to go to work for another organisation, their employer may wish to have in place safeguards to protect sensitive information relating to the business, to prevent it from falling into the hands of a competitor.
One possible way of doing this is through a post-termination restrictive covenant, but this will only be enforceable if the ex-employer can show that it is reasonably necessary to protect his legitimate business interests, which include trade secrets or confidential information and customer information. A restrictive covenant that goes beyond what is reasonably necessary to protect these interests will not be enforceable. However, a restrictive covenant that is widely drafted may be reasonable in the case of senior employees, depending on the individual circumstances involved.
In addition, all employees have a duty to serve their employer with honesty and fidelity. Company directors owe a fiduciary duty to act in the best interests of the company, as do employees who hold a senior position within the organisation. Employees who become shareholders may also be bound by the terms of any shareholder agreement entered into.
In a recent case, three employees who had held key roles working for a specialist provider of rehabilitation and case management services all resigned over a period of time and went to work for a competitor company. They did not inform their employer of their intentions or the identity of their new employer.
The High Court found that all three ex-employees had breached their duty of fidelity by positively misleading their former employer as to their true intentions. Two were also found to be in breach of their fiduciary duties because they had not informed their former employer of their negotiations with a competitor. The two also held shares in the company and were found to be in breach of restrictive covenants, contained in the shareholders’ agreement, which ran for one year from the date when they ceased to be connected the company. The Court judged that although the post-termination covenants were very wide, in the circumstances they were reasonable to protect the legitimate interests of the business and were therefore enforceable.
As a result of this ruling, substantial damages will be payable by the three ex-employees.
We can advise you when drafting post-termination restrictive covenant clauses to ensure that they are tailored to cover the particular circumstances relating to the individual employee concerned.
