Resignations: protecting the business

Sarah-Marie Williams of Clyde & Co LLP continues a series of articles on resignations with a look at ways in which employers can protect their business when an employee resigns. Garden leave clauses can be used to prevent an employee from having access to customer information during notice, while restrictive covenants can prevent an employee from soliciting, or dealing with, clients, or working for a competitor, post termination. Employers also need to protect their business by dealing with employees whose conduct or performance during notice is potentially damaging.

Garden leave

An employer faced with an employee who has resigned may prefer that he or she does not work notice. There may be concerns that the departing employee will use the notice period to access and misuse client records and confidential or commercially sensitive information. Employers can seek to protect their business and prevent employees from having access to the workplace during notice by putting them on garden leave. Contractual garden leave clauses allow employers to require employees to stay at home and not to work during all or part of the notice period.

During garden leave the individual remains an employee. Given that the employment contract continues, the employer and the employee must continue to honour the terms and conditions of employment. Therefore, the employer must pay salary and provide all other contractual benefits. The employee, meanwhile, is prevented from working for a competitor as he or she is still under a contract of employment.

If an employer puts an employee on garden leave in the absence of a clause in the contract that allows it to do so, it will be in breach of contract, and the employee may argue that it is unable to rely on contractual rights such as restrictive covenants. Therefore, employers should ensure that their contracts include a garden leave clause if they wish to have the option to put employees on garden leave during the notice period. Whether or not it is appropriate or necessary to invoke a garden leave clause depends on the individual case.

Restrictive covenants

A contract of employment may include restrictive covenants that seek to restrict an employee's activities post termination. For restrictions not to be void for being in restraint trade and contrary to public policy, they must:

• seek to protect the employer's legitimate business interests; and
• go no further than is reasonable to protect those interests.

There is no guarantee that a restrictive covenant will be enforced by the courts. Clauses are considered on a case-by-case basis by reference to the business needs of the employer imposing the restriction and the employee's position with the employer (Mason v Provident Clothing and Supply Co Ltd [1913] AC 724 HL and H Morris Ltd v Saxelby [1916] 1 AC 688 HL).

The courts do not determine cases in a way that would prevent employees from using experience and skills that they have gained on the job. Therefore, when drafting restrictive covenants, an employer should distinguish between information and knowledge that the employee will acquire during the course of employment and information or knowledge that may be regarded as the employer's property. If there is a legitimate business interest to protect, the employer should impose a restriction that is no wider than reasonably necessary to protect that interest (Allied Dunbar (Frank Weisinger) Ltd v Weisinger [1988] IRLR 60 HC). It should limit the covenant by reference to a period and geographical limit, as necessary to protect the employer's legitimate business interests. Where this is not done, the covenant is unlikely to be enforceable.

There are three types of restrictive covenant that employers can include in contracts of employment, namely: non-solicitation covenants, non-dealing covenants and non-competition covenants.

Non-solicitation covenants

There are two types of non-solicitation covenant; non-solicitation of customers and non-solicitation of employees. Non-solicitation of customers covenants aim to prevent employees from taking customers from the employer post termination. They seek to impose a prohibition on employees from soliciting customers of the employer for a set period following termination of employment. To be enforceable, covenants should preferably be restricted to customers with which the employee had contact during a specified period before termination (Office Angels Ltd v Rainer-Thomas and O'Connor [1991] IRLR 214 CA).

Non-solicitation of employees covenants seek to prevent former employees from soliciting the employer's remaining employees. When drafting a covenant the employer should consider for how long the departing employee will have an influence over remaining employees as a result of having worked for the employer, and over which groups of employees the influence will exist. It is unlikely that a court will enforce a non-solicitation covenant in respect of all of an employer's employees, as this would be too wide.

Non-dealing covenants

A contract may contain a non-dealing clause that seeks to preclude the employee from having business dealings, or transacting business, with any customer of the employer following termination of employment, irrespective of whether the customer makes the first approach. If a customer contacts the employee during the period of the restriction the covenant prevents him or her from dealing with the customer.

This is a tighter restriction than a non-solicitation of customers clause. The employee will be in breach of the covenant if he or she deals with a client of the employer, even if he or she took no active steps to make initial contact with it. As non-dealing covenants seek to restrict not only the rights of former employees but also the rights of third parties (ie to choose with whom they do business), they are harder to enforce.

Non-competition covenants

The contract of employment may include a non-competition covenant that seeks to preclude the employee from competing with the business of the employer by working for a competitor following the termination of employment. Non-competition restrictive covenants have traditionally been harder to enforce than non-solicitation or non-dealing restrictions because they impose a greater restriction on employees' movements and ability to work. A court is more likely to enforce a non-competition covenant if the restriction is for a limited period of time and the geographical extent of the restriction is limited to what is necessary to protect the employer's legitimate business interests.

Breach of restrictive covenants

If, following termination, an employee breaches a restrictive covenant, the employer will have a potential claim for breach of contract against him or her. If the employee's new employer is also involved in the breach (which is often the case), the employer will have a potential claim against it for inducing the ex-employee to breach the contract.

If an employer believes that a former employee is in breach of a restrictive covenant it should apply, initially, for an interim injunction to prevent him or her (and the new employer if necessary) from taking the action that is in breach of the covenant. Applications for an interim injunction are often made without notice to the employee and/or new employer. Where the injunction is granted, it will be on a temporary basis after which there will be a further court hearing to allow the employee and/or new employer to defend the injunction. If the injunction is upheld, it will usually continue until the full trial (ie for the breach of contract claim).

Performance during notice

Most employees who resign continue to work diligently for their employer during their notice period. However, some employees who no longer feel committed to their employer or job allow their performance and conduct to deteriorate, as a result of which the employer's business may suffer. Where a departing employee's performance and conduct begins to decline during notice, the employer should monitor the situation closely and address the matter with the employee as soon as possible to nip the problem in the bud.

If necessary the employer can invoke its procedure for dealing with poor performance, as it would if the employee were not under notice. If the matter is sufficiently serious it can take disciplinary action under its normal procedure. Most employees do not want to leave employment "under a cloud", particularly as this could be damaging to future job prospects, and respond to the threat of formal action with an improvement in performance and conduct.

Impact on morale

Employers may need to take steps to prevent departing employees from damaging the morale of remaining employees. An employee who is leaving may make negative comments to colleagues about the employer and its business and clients. While it is difficult for employers to prevent this, and to some extent employees are entitled to voice their opinions, employers do not need to tolerate employees acting in a way that damages the business and is in breach of the implied duty of good faith.

If an employer becomes aware that an employee is becoming a damaging influence on other staff, it should address the matter with him or her. An informal conversation with, or letter to, the employee, making clear that his or her negative attitude is having a damaging effect on morale and is not acceptable, may be enough to change the behaviour. Failing that, the employer could take disciplinary action against the employee where the conduct is sufficiently serious. It may wish to consider options for keeping the employee away from the workplace during the notice period, for example by invoking a payment in lieu of notice or garden leave clause in the contract (see above and Resignations: employee notice in this series for more details).

Social networking

Employers should be aware of the potential damage that can be done to their business by employees who post negative comments about them on social networking sites. Employees who are leaving are more likely to do this than those who remain in employment. Comments may be seen by existing and potential employees, and by individuals who work for clients and competitors.

If an employee is known to be an active social networker and has been negative about the employer in the past, it is in the employer's interest to monitor the situation. Although employers may need to adopt a tolerant approach to mild comments, where employees have posted comments that are malicious, excessive or defamatory, action may be justified. While it may be difficult for the employer to have the material removed, it can inform the employee that it is aware of what he or she has done and request that he or she delete the offending material. In serious cases, where the employee's actions undermine the contract of employment, the employer could take disciplinary action.

Returning property

Employers should have procedures in place for ensuring that property belonging to them is returned when employees leave. The contract of employment should include a clause requiring employees to return all property (including company car, mobile phone, all documents, manuals, hardware and software) obtained in the course of employment on termination of employment. The contract should also enable the employer to make appropriate deductions from an employee's salary to cover the cost of the property should the employee fail to return it. (See Return of company property contract clause in the XpertHR policies and documents section for a model clause.)

If an ex-employee fails to return the employer's property on termination, the employer should write to him or her and ask for it to be returned, referring to the contract clause if appropriate. If the ex-employee persists, the employer may be left with no option but to write and advise him or her that it will take further action to recover its property.

Next week's topic of the week article will be a checklist on the practicalities of managing resignations and will be published on 25 January.

Sarah-Marie Williams (Sarah-Marie.Williams@clydeco.com) is a solicitor at Clyde & Co LLP.

Further information on Clyde & Co LLP can be accessed at www.clydeco.com.