The profitability of your business can be exposed to serious risks when employees resign, particularly those in senior, critical or trusted positions. A common scenario which emerges is where a former employee establishes a competing business, and poaches your most valuable clients.
The former employee is often in a position to do so by offering discounts on your own prices, or by using knowledge of your clients’ needs which they have obtained during their former employment.
- What obligations do employees owe to their former (and current) employers
- What steps can you take to protect your business, to prevent a former employee “poaching” clients
The obligations owed by employees (both current and former) relating to confidential information obtained during their employment can come from:
- The contract of employment (which is usually in writing, but not always)
- Obligations imposed by the general law to act in an employer’s best interests, which includes a duty not to misuse the employer’s confidential information
- Obligations imposed on employees by sections 182 and 183 of Corporations Act, which prohibits an employee (or director or officer) from improperly using any information acquired to gain an advantage for themselves (or someone else), or to cause detriment to a company.
What is confidential information?
- Trade secrets, in the sense that it is information which, if disclosed to a competitor, has the potential to cause real or significant harm. The law (whether or not there is a contractual agreement expressly restricting such use) will protect against the employee using such information. This protection extends after the employee’s employment ends.
Factors which are considered include whether the employer has taken steps to guard the secrecy, whether there has been limited circulation of the information within the employer’s business, the value of the information to the employer and any competitors and how easy it would be to acquire or duplicate the information.
Examples of trade secrets are unlimited, and have included designs, pricing/costing information, customer lists, manufacturing processes, profit and loss figures and details of suppliers to an employer’s business known to be reliable.
In this context, it is helpful if an employee’s employment contract has specific descriptions of the information that the employee is prohibited from using, whether during and after the term of employment.
- “Know-how”, in the sense of information that is confidential but is considered to be retained knowledge: this is the stock of knowledge, skill and experience the employee builds up by working.
Whilst employers are entitled to protect confidential information from being misused by a former employee, the Court will consider whether the employee should be expected to refrain from using the employer’s confidential information where that would prevent them from legitimately exploiting (to earn a living) their own skill, experience and knowledge.
If an employer wishes to protect information of this kind, a reasonable restraint of trade is needed.
- Trivial information, being information which is confidential but unworthy of protection because it is “useless” or just “pernicious nonsense”, where the former employer has no legitimate interest in preventing its further use. This also includes information already in the public domain.
Restraints of trade and express contractual prohibitions
Whilst the departing employee cannot make, or take, or deliberately memorise, a list of the business’s customers, they can use their retained knowledge of the business’s customers in order to solicit business. If the employer wishes to protect against a former employee using “know-how” (rather than trade secrets) in competition against them, express contractual prohibition is needed.
Employers can be better protected by securing the employee’s agreement not to compete or work for a competitor for a defined period and within a defined area. A restraint of trade is enforceable in New South Wales, unless it is wider than is reasonably necessary to protect the employer’s interests. This takes into account the period and geographical area of the restraint, and the activities which are restrained.
Tips for concerned employers
- Ensure your employment contracts are properly drafted with a reasonable restraint of trade clause. Avoid using standard employment contracts for every employee but rather tailor each contract to a particular prospective employee. Employment contracts which have confidential information clauses drafted in excessively wide terms are not helpful. Employment contracts should instead identify specific information considered by the employer to be confidential.
- Take steps to protect confidential information within your business, by restricting circulation to only certain employees, the use of passwords or other security measures.
- At the exit interview, remind the employee of continuing confidentiality obligations (under their employment contract and at law), or, where necessary, consider retaining a solicitor to write to them reminding them of these obligations.
- If you are concerned an employee has copied or taken information from the business’s computer system, an analysis by a forensic computer expert may be necessary. The employer will also need to establish the information in question is in fact confidential as a matter of law; it is not sufficient merely to say that it is, or point to it having been copied or taken.
- Investigate any concerns and move quickly. Injunctive relief can be obtained for a breach of confidence whether to restrain the initial breach or to prevent further breaches). Where an employee (or his new business or new employer) has profited from a misuse of confidential information, an employer can be entitled to an “account of profits” or to damages for any breach of contract.
How we can help
Andrew Thorpe, Partner and Samantha Peterson, Partner, and the litigation team, have extensive litigation experience acting for employers and employees in relation to matters concerning confidential information, enforcement of restraints of trade and forensic analysis of computer systems.
McLachlan Thorpe Partners can also help employers by reviewing their standard employment contracts, and to tailor employment contracts to particular employees. This will ensure your confidential information and business are protected as far as possible against the risks posed by departing employees.