Friday, 17 August 2018

CONTRACT OF EMPLOYMENT: PROTECTION OF EMPLOYERS

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While a contract of employment is usually considered a document that protects the interest of the employee, it also protects the interest of employers from employees. An employer may seek to protect the use of information he deems integral and invaluable to the success of his business by restricting the use of this information by employees both during the employment and after the employment ends. Many employers protect their information by including in the contract of employments restrictive covenants.

Restrictive covenants are conditions or clauses inserted into contracts which may prohibits an employee from divulging confidential information obtained during the course of his employment to third parties or prohibiting an ex-employee from competing with his ex-employer for a certain period after the employee has left the business or prevents the ex-employee from soliciting or dealing with customers of the business by using knowledge of those customers obtained during the employment.

The following are examples of restrictive covenants an employer may insert into a contract of employment to protect himself:

  1. Confidentiality Clauses – Also known as non-disclosure clauses, they are clauses that restrict an employee’s use and dissemination of the business-owned confidential information to third parties. By accepting the employment and signing the contract, the employee agrees not to disclose information considered confidential by the employer to third parties.
  1. Non-Compete Clauses – These are clauses in an employment contract that, in the event that the employee stops working for the employer, restricts the former employee from working in similar employment for a competitor or start a similar profession or trade in competition against the former employer for a set period of time.

Some employers insist that this non-compete clause be inserted in employment contracts because of the possibility of an employee, upon termination or resignation, working for a competitor or starting their own business and gaining competitive advantage by abusing confidential information about their former employers trade secrets or sensitive information such as client lists, business practices, upcoming products, etc.

However, due to the restrictive nature of these kind of clauses, their enforceability depends on the situation. Not all non-compete clauses are enforceable as the courts may find a particular non-compete too severe.

  1. Non-Solicitation Clauses – These are clauses inserted into some employment contracts that, in the event the employee stops working for the employer, restricts the former employee from soliciting or poaching the clients, customers, employees, suppliers, etc of the former employer.

If A, a hairstylist, stops working in B’s hair salon and opens his own salon within the same area, B would want protection against A stealing his customers and other employees. This is why some employers insert a non-solicitation clause in employees’ contract of employment. But for a non-solicitation clause to be enforceable, it must be clear, unambiguous and reasonable.

  1. Non-Dealing Clause – This clause restricts a former employee from dealing with former clients, customers, suppliers etc. It is similar to the non-solicitation clause with the difference that the former employee is restricted even if the former clients and suppliers are the ones who approach the former employee.

For a restrictive covenant to be enforced, it must not be drafted too widely. Certain factors will be considered before a restrictive clause is justified:

  1. The length of time of the post termination must be justified. The clause must specify the length of time the former employee will be restricted and cannot restrict indefinitely. Depending on the industry or type of business, anytime beyond 6-12 months after termination of employment may be unjustifiable.
  1. The geographical area of the restriction must also be reasonable. Restricting a former employee from doing similar business “anywhere in the world” is far too broad and unlikely to be considered reasonable by a court. A specified limited geographical radius would be more reasonable.

However, it should be noted that a non-solicitation does not need to be geographically limited to be valid. Because of technological developments and social media, the world has become a smaller place and customers are no longer limited geographically.

  1. The scope of the prohibited activity must be clear and specific. Is the person restricted from working for a specific list of competitors or does the clause try to stop the employee from working for “any” businesses competitive with the employer or that of any of its subsidiaries and affiliates? Where the scope is too broad, it may be considered unreasonable and unenforceable.
  1. The type of interest being protected will also be considered. For instance, information such as trade secrets may be granted wider protection than client information by the courts.
  1. The courts may also have regard to what is standard practice in the employers industry with regard to such restrictive clauses.

The extent of clauses is relative to the employee’s position within the business. As more senior employees will be in contact with more sensitive information, restrictions placed upon them will be more justified.

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