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Restrictive covenants and confidentiality provisions in employment contracts

Gwendoline Davies and Nick McQueen, Partners in the Dispute Resolution team - Walker Morris,

The working world is changing. Following the Covid-19 pandemic many employees have realised the opportunity that remote working provides and they are keen to continue to make use of it.  Remote working has also allowed employees to access new roles that may have been  previously out of reach, due to there being less geographical limitations on where you must live to carry out a specific role.

This has enabled employees to move roles within their market, spurring ‘the Great Resignation’, and search for a better work-life balance, taking advantage of new found flexibility in new opportunities. Because of this, some have preferred to coin this shift as ‘the great restructure’, and many organisations expected this trend to come to an end with employees realising the grass isn’t always greener. It appears that the trend is continuing though, with a recent survey revealing that over half (55%) of workers surveyed were considering leaving their jobs in 2022 and 29% of employees surveyed admitted taking data from their employer[i].

However it’s described, the importance of appropriately drafted restrictive covenants and confidentiality provisions has increased as a result.

Risks and Issues
There are many benefits of new working models to employers, such as increased efficiency and profitability, but they may also increase the risk of confidential information being extracted and disclosed more easily.

As more employees look to move to different roles along with companies adopting less traditional working models, businesses are left open to potential risks when faced with a departing employee. That can include: poaching colleagues, soliciting clients, setting up competitor businesses; and taking or disclosing confidential information.

There is a risk that, during or following termination of their employment, employees or ex-employees may take advantage of confidential information, strategic plans, customer and client details or other important information relating to their employer’s business, which could be seen as beneficial to a rival business.

While employees are subject to implied duties including a duty of fidelity and a duty to not misuse confidential information, these implied duties are limited after termination of the employment contract, and the associated risks increase.

Mitigating the risk
It’s common for employers to include express terms which restrict an individual from taking certain actions or using confidential information that could detrimentally affect the business. Such terms are commonly referred to as restrictive covenants and confidentiality provisions.

It’s important to make sure that restrictive covenants and confidentiality provisions, particularly in employment contacts, are appropriately drafted in the first place so that they can be enforced.

Because of the unequal bargaining position between employers and employees, courts often don’t look kindly on overly burdensome terms that bind an employee to unreasonable restrictions. Courts are also reluctant to enforce restrictive covenants that are either vague or broad, and so the covenants must be well drafted and have clear, specific content.

Employers can also conduct a health check of internal processes and policies, and draft their employment contracts, with help from a specialist employment team, with a view to protecting themselves as far as possible.

What to do if there is a breach?
If you suspect there has been a breach or will be a breach, it’s important to take advice as early as possible. There can be many issues caused by such a breach including financial damage, reputational risk, data breach and privacy issues.

It’s crucial to evidence a breach and collate the evidence in the right way to make sure that it’s admissible in court – there may also be a requirement for detailed IT analysis to be undertaken and to collect and keep information or documents forensically.

Where an investigation reveals that enforcement action is required, undertakings can be sought. In the absence of undertakings being given or where there is a continuing breach, confidentiality provisions and restrictive covenants are generally enforced using an injunction (an order from the court for a party to do something or stop doing something, whether on a temporary or permanent basis).

Injunctions are an equitable remedy, which may be granted at the discretion of the court by reference to what it regards as fair in the circumstances. Where an employer tries to gain financial recompense they will need to demonstrate loss resulting from the breach, for example, loss of profits on contracts, or opportunities diverted by the former employee.

Where the employee has been induced by a competitor into breaching restrictive covenants, the employer can also consider taking action against that competitor – an attractive option as the competitor company is likely to have greater resources to pay any award of damages.

Businesses should seek out legal advice as early as possible, to make sure that employment contracts are robust and include appropriate restrictive covenants, to protect themselves. Advice from experts in this area can support with drafting restrictive covenants and obtaining interim injunctions through to enforcing injunctions and taking matters to trial.

[i] How the Great Resignation is Creating More Security Challenges – Tessian

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