Key takeaways
Check enforceability of existing restrictive covenants
Not all clauses survive termination or apply to new roles.
Assess risk before onboarding senior hires
Early legal review can prevent costly disputes later.
Consider tailored agreements for critical positions
Clear, updated covenants strengthen business protection strategies.
Introduction
As almost any CEO will tell you, the greatest asset of a professional or financial services business is its employees. However, your employees, particularly new employees joining from a competitor business, may also be one of your biggest vulnerabilities. This is because an employee, either before or after joining you, may act in a manner that exposes your business to legal proceedings brought by their former employer.
This article summarises the key concepts that you need to consider, when hiring new employees, including the steps that should be taken to protect your business.
Misuse of confidential information
When an employee’s previous employment is terminated, they no longer owe their former employer an implied duty of good faith and fidelity. However, they will continue to be prohibited from misusing any information which constitutes a ‘trade secret’.
It is also possible that your new employee’s previous employment contract contained express confidentiality clauses specifying that all confidential information continues to be protected after the termination of their employment.
Restrictive covenants
New employees may also be bound by post-termination restrictive covenants contained in their former employment contract and/or service agreement.
Common types of post-termination restrictive covenant include:
A non-compete covenant: this is generally regarded as the most powerful weapon in a business’ armoury as it prevents an employee joining a competing business for a defined period after termination.
A non-solicitation covenant: this prevents an employee from approaching the customers and suppliers of his former employer for the benefit of his new employer.
A non-dealing covenant: this prevents an employee having any dealings with customers and suppliers of his former employer. The practical advantage of a non-dealing covenant is that it can often be easier to police than a non-solicitation covenant because it is not necessary to evidence the fact that the ex-employee made the first move to contact the customer or supplier.
A non-poaching covenant: this prevents an employee from poaching employees from his former employer.
The general position is that post-termination restrictive covenants are void on public policy grounds as being in restraint of trade unless they protect a legitimate business interest and are drafted as narrowly as possible in protecting that interest. The main legitimate interests of professional or financial services business which covenants may protect include: client connections; connections with suppliers; confidential information (including trade secrets); and the stability of a business’ workforce.
A covenant which is drafted more widely than is reasonably necessary to protect a business’ legitimate interests is likely to be unenforceable. Clearly, the types of covenants that are appropriate to a particular business will depend on the specific interests that need to be protected (for example, a non-solicitation/non-dealing covenant may be sufficient to protect a business where the interest that requires protection is customer contact lists). Non-compete covenants are the most onerous covenants as they may severely limit the ability of an individual to make a living for the duration of the restricted period and, for this reason, non-compete covenants are also the most difficult to enforce (although enforcement is nonetheless possible in certain circumstances).
It is common practice for restrictive covenants to last between six and 12 months (a period of restraint in excess of 12 months will usually be unenforceable), but the precise duration of the covenant really depends upon what is appropriate in the particular circumstances of the case.
It is important to note that the reasonableness of restrictive covenants is assessed as at the point at which the covenants were entered into (which is normally at the time the employee signed the employment contract or service agreement). Therefore, it is important to consider whether a restrictive covenant was fit for purpose at the time it was entered into, having regard to the role and level of seniority of the employee.
Steps to take when hiring a new employee
If you are hiring a new employee:
Always ask to see their employment contract in order to review any post-termination restrictions or confidentiality obligations in terms of their old employer.
You should speak to legal advisors to discuss enforceability of those restrictions and whether you can safely proceed with the hire of the employee in question.
You should give the potential employee the instruction not to provide you with any confidential information or property of their old employer.
If you have employed a new employee and are facing legal action from an old employer:
Seek immediate legal advice to discuss what steps should be taken in relation to the new employee (including any investigation that may need to be undertaken in relation to their conduct) and how best to deal with the threats made by the old employer concerning any court proceedings that may be issued.
How we can help
We advise on proposed recruitment activities, including the recruitment of individuals (and, potentially, whole teams) from competitors in order to minimise the risk of litigation as far as possible.
We can review a new employees previous employment contract and advise on the enforceability of the restrictions therein, to give you the comfort that you require when making the hire.
We can help you to manage any litigation that is brought against your business and obtain a successful commercial resolution.
