June 11, 2019

Protecting Company Rights from the Beginning of the Employment Relationship

Employees leave employers. Good employees leave good employers. Managing the departure of a key employee, whether leaving voluntary or involuntary, can be fraught with issues. Particularly when a company is attempting to protect information that it considers confidential or a trade secret, or protecting its customer/client base and/or employees from solicitation.

Protecting company rights to confidential information, client bases and a stable workforce should not be a reactive exercise.  In fact, it is best to start in the form of a solid and enforceable employment contract that sets out the expectations of the company and the employee once the employment relationship inevitably comes to an end.  Employment contracts for senior employees, or employees handling issues such as trade secrets should cover (amongst other things) 2 main issues:

  1. Confidential information – what is it and how is it to be treated both during and after the employment relationship; and
  2. Restrictive covenants – how former employees can (if at all) have access to, or maintain contact with, the employer's clients, customers and even employees after the employment has ended.

Confidential Information

The law requires an employee to observe a duty of fidelity to his or her employer during the course of employment.  This duty requires an employee not to wrongfully disclose or use any information that is confidential to the employer, or information that the employee has no authority to use.  However, once the employment has ended, there is no continuing duty of fidelity placed on the employee.  The duty then only extends to the employee not disclosing confidential information that is either a trade secret, or a highly confidential equivalent.  So then, how can you best go about protecting confidential information once an employee's employment has been terminated?  Firstly, it comes down to the terms of the employment contract.  In order for post-employment confidentiality provisions to be effective, it is imperative to properly set out specifically what information constitutes highly confidential information and trade secrets.  Note that usually information such as client lists, prices and marketing strategies are not considered trade secrets.   Courts have the view that trade secrets are those which, if disclosed to a competitor, would be liable to cause significant harm to the owner of the information such as secret manufacturing processes (think KFC's "11 secret herbs and spices").

Recently, Bombardier alleged that Bombardier trade secrets were misappropriated and were being used by Mitsubishi Aircraft for the certification of the MRJ Regional Jet.  In this case, Bombardier failed to identify any Mitsubishi Aircraft America employee or executive who took or viewed a trade secret.  The case was dismissed, with the courts stating that merely recruiting another company’s employees does not meet the knowledge requirement for trade secret misappropriation.  This demonstrates that protecting highly confidential information or trade secrets is a difficult exercise.

To indicate to employees that information is "highly confidential" in nature or considered a trade secret, you should advise those employees of the information that you consider such.  This is best initially done through a confidentiality clause in the employee's employment contract. Descriptions of highly confidential information or trade secrets should be as detailed as possible.  Once the employee commences employment, such information should also be treated confidentially within the company.  For example, marked "highly confidential" and stored in folders accessible only to those who necessarily require the information for the exercise of their duties, or by using document passwords.  Consider using alerts if certain documents are in fact accessed, to remind employees of the confidential nature of the information that they are accessing.      

Protecting confidential information in the workplace can be difficult.  Employers have no right to protect against an employee using his or her know how, skills and knowledge acquired whilst on the job. In general, a court will protect an employee's freedom to use his personal skills and knowledge for his or her own benefit, and his or her rights to carry on his or her trade or profession.  However, the information must have been obtained honestly and ordinarily in the course of employment. If an employee, for example, was to download confidential information of the employer, or to copy or even memorise the information, then the courts would likely consider the use of such information as a breach.

Restrictive Covenants

Hong Kong law starts with the premise that terms in an employment contract that purport to restrict an employee's activities once  no longer employed are contrary to public policy and therefore unenforceable.  This is because articles 33 and 41 of the Basic Law grants on Hong Kong employees the "freedom of choice of occupation".  This is unless the restrictive covenant is designed to protect the legitimate interests of the company and it extends no further than is reasonably necessary.  In other words, employers are not allowed to protect themselves against competition in itself, but only against the exploitation of the employer's trade secrets and connections.  Restrictive covenants can be broken down into three main areas: non-compete clauses, non-solicitation of customer/client clauses, and non-solicitation of employee clauses.

In order to be enforceable, an employer will need to show that the restriction is reasonable to protect a legitimate business interest.  Reasonableness is usually measured by reference to three key factors:

  1. The geographic area of the restriction;
  2. The duration of the restriction; and
  3. The specific activity that is to be restricted.

If the restriction is expressed too widely, it will generally be found to be void, and therefore of no effect.  What is considered "unreasonable" or "too wide" is not one size fits all.  A standard restrictive covenant used across all employee groups is likely to be questioned as to its reasonableness.  This is because it will not take into account important factors such as the seniority, length of service or position which the former employee held within the company.  The facts of each situation will need to be considered having regard to what is reasonable for that type of employee.  For example, a non-compete clause for a 6 month period working within a specific industry throughout Hong Kong will be unlikely to be upheld for a junior accounts person.  However, if that same restriction was placed on a sales director who had close connections with a company's trade contacts, it would be more likely to be upheld. 

The duration of the restriction will likely depend on what is considered to be the minimum time the company requires to protect customer and client connections.  This would normally be the amount of time it would reasonably take for a replacement employee to be employed, and for that employee to establish a relationship with the customers and clients of the employer.

It is important to remember that, if found to be void, the courts will not impose an alternative restrictive covenant that it considers reasonable under the circumstances.  The courts cannot rewrite the terms of a clause that is otherwise unenforceable (for example, changing the duration of a restriction from six to three months).  So in order to ensure that your information is properly protected from departing employees, it is imperative that the restrictive covenants are drafted with careful consideration.

You may also consider including a "gardening leave" clause in your company's employment contracts.  Gardening leave refers to a clause in the employment contract that requires an employee to stay away from the workplace but remain in employment and be contactable during the notice period.  This will generally ensure that during the notice period, the employee's obligations of confidentiality, good faith and fidelity remain.  There are some caveats to this.  For example, in Hong Kong, employees have the right to "buy out" their notice periods, by simply making a payment to the employer "in lieu of notice".  Therefore, should an employee want to circumvent a gardening leave clause, it is easily done so.  Secondly, courts are increasingly aware that gardening leave clauses are being used by some employers as an alternative to restraint of trade clauses in employment contracts. Resultantly, in some circumstances, the courts have treated the gardening leave clause as in fact a restraint of trade clause and therefore impose the same tests imposed on restraints of trade.

Take Away Points:

  1. Do not take the "one size fits all" approach to restrictive covenants.They should be drafted with regard to a number of factors including the nature of the business, the nature of the role of the employee and the seniority of the employee.
  2. Think carefully about what your business considers to be "trade secrets" or highly confidential equivalents.Expressly state what these are in the employment contract.Ask yourself, "what is the element of secrecy in this information?".
  3. Treat trade secrets or highly confidential equivalents carefully within the organisation.Telling employees what you consider to be a trade secret or confidential, and restricting access to such information will indicate to the court that the information had the necessary quality of confidence, and the way that the information was imparted to the employee may give rise to an obligation of confidence.
  4. Consider offering existing employees new contracts of employment with well-considered restrictive covenants at times of promotion, to reflect their new levels of seniority or roles in which they will be handling the trade secrets or highly confidential information.