Employment & Competition
Employment contracts are subject to the restraint of trade doctrine and to the Competition Act, in relation to anti-competitive restrictions. The restraint of trade doctrine is a long standing common law principle. The Competition Act focuses primarily, on agreements or arrangements between undertakings or businesses. However, it may impact on employment agreement in some limited circumstances.
Employees as such are not undertakings under the Competition Act. An undertaking must be a separate economic operator. However, once an employee leaves the employment and sets up in a business, he becomes an undertaking. A restrictive clause in an employment may become void, if the employee commences business on account, if it is breach of the legislation.
The Competition Authority issued a note under earlier (almost identical) competition legislation dealing with non-complete clauses in employment contract. The Authority was of the view that while such agreements by themselves might have minimal impact on competition, the cumulative effect of a network of such agreements, might eventually restrict competition.
Employment agreements commonly contain classes prohibiting an employee from soliciting former employees and clients or customers of the same employer. The Authority has indicated that a restriction must be no wider than necessary, in order to protect the employer’s interest. It should generally be limited at a minimum, to apply to solicitation of those who were customers and employees at the time of termination. This does not imply that such a clause would be necessarily valid.
Confidentiality clauses in themselves do not breach the Competition Act in themselves, provided that the information is genuinely confidential and is not designed to restrict competition.
Non-complete clauses potentially breach competition law. The Competition Act require that post-employment restrictions are permissible only in so far as they protect the employer’s legitimate interests. They must be tailored to protect such interest and must be no wider than strictly necessary for that purpose. The considerations are broadly similar to those which apply under the restraint of trade doctrine.
There should be market, geographical and time limitations..A post-employment restriction of more than a year risks breaching the legislation. There must be objective justification for the restrictions. It must be the prohibition of competition in itself. Restrictions arising in the sale of a business are more readily justifiable.
The employee owes a duty of fidelity to the employer while still employed. This precludes taking action, which is harmful to the employer’s business, including competing with it. However, the employer is entitled to take steps with a view to life after termination of employment, even while still employed. This is limited by the duty of good faith and loyalty, which for example may preclude taking of advantage of access to information for future business in completion to the employee (such as the making of customer lists).
An employer is not entitled to protect itself from competition in itself, from a previous employee. The employee is entitled to use his personal skills and experience to earn his livelihood, once he has left employment. Indeed, provided that it does not breach the duty of fidelity, he may work another job while employed.
In principle, any restraint of trade is invalid, unless it is reasonable in the interest of parties and the public. They party who claims that it is reasonable, almost invariably the employer, bears the burden of so proving.
An employer may incidentally restrain a former employee by a covenant that protects his intellectual property and legitimate business interests. A covenant by an employee not to compete may be enforceable, if it is reasonably necessary to protect some proprietary interest of the employer.
The employer may claim protection from misuse of trade secrets and some categories of confidential information. Short of intellectual property, the employer must be able to identify some advantage or asset inherent in the business which can be regarded, in a general sense, as property.
The employer’s protectable quasi-proprietary rights may include elements of goodwill, trade or client connection in some cases, although its exact scope is unclear. It must be such that it would be unjust to allow the employee to appropriate it for his own purposes. It may be protected, even though the employee may have made a contribution to it.
Scope of Restrictions
Any post-employment restriction or restraint must reasonable and tailored to protect the employer’s protectable interest, in all the circumstances of the case, both as to its the nature and its extent. A total restriction may, for example by impermissible, while a non-solicitation obligation may be permitted, provided that it is not too wide.
The duration and geographical extent of the restriction is central in determining what is or is not reasonable. Each case will turn on its own facts. If the prohibition is too wide, it will be void and invalidated.
The obligation to protect trade secrets subsists beyond employment. It does not require a specific covenant.There are a number of types of confidential information, some of which may be capable of being protected. Readily available information is not protectable at all.
There may be information which the employee is obliged to treat as confidential, either because of its nature or because of it is specifically required to be treated as confidential. It may be learned by the employee and become part of his own knowledge and skill base. In this case, a disclosure during employment would be breach of the duty of fidelity. This type of confidential information may be used after a cessation of employment. However, an employer may protect this information by covenant, which must be reasonable as to duration and extent.
Employer Trade secrets are so confidential that even if learned, they are protected after cessation of employment and may not be used for another’s benefit. Trade secrets are hard to define, but would include, for example, what is specifically protected by intellectual property and a wider category. What is a trade secret at one time may cease to be because of developments.
Some highly confidential information, short of a proprietary trade secret is protectable. The nature of the information is relevant to the obligation of confidentiality. Where information is specifically impressed with a duty of confidentiality, it is more likely to be protected. However, what is not confidential cannot be made confidential by labelling it as such.
Confidential information may take various forms. It may be something which can be copied in written or electronic form. It may comprise close customer/client connections, which have been built up and have a substantial element of goodwill. In this case, the identity of customers or clients may be confidential. Restrictions on soliciting clients for a period maybe legitimate in such cases.
An employer may develop intellectual property in the course of employment. The employment contract will usually provide that where works and inventions made in the course of employment belong to the employer.
Effect of Breach
Contract sometimes provide that an employee may not take up employment in breach of a restrictive covenant for a period, until a so-called “gardening leave” period has expired. He is precluded from taking up employment with a third-party during that period. The employer is not obliged to provide work for the employee in the period, although he must be paid in principle.
Provided that it is reasonable, an injunction may issue to prevent breach of an obligation not to work for another. In general, courts are more willing to enforce restrictive clauses with gardening leave provisions, than other and clauses without provision for payment.
Variations of the terms of the contract require the consent of the parties. Significant variation without consent may constitute constructive dismissal, if the employee is justified in resigning in response.