The second session of the Innangard Global Employment Law Conference looked at restrictive covenants around the world. Panelists from Australia, England, Ireland, Italy and Germany discussed the similarities and differences between their jurisdictions about trends and enforcement of post-employment restraints.

The need for Post-Employment Restraints

It was agreed by the panelists that the law of their respective jurisdictions require employees to owe their employers a general obligation of loyalty, confidentiality and non-competition during the employment relationship. However, as there is no general rule in relation to these matters that applies by implication after termination, restrictive covenants should be included in the employment contract relating to non-competition, exclusivity, confidentiality and non-solicitation.

All panelists agreed that restrictive covenants around the world are more common for senior executives, or those working in research and development. This is largely by virtue of their importance to their organisations and the confidential information to which they have access.

The panelists agreed that the preferable option was to have post-employment restraints contained in the employment contract to provide certainty for both parties on rights and obligations. In all jurisdictions negotiation and entry into a deed containing post-employment restraints or (less commonly) injunctive relief from the Courts in the event of termination of employment by either party are common practice.

Validity of Post-Employment Restraints

All jurisdictions covered by the panel maintain the general principle that restraints placed on employees following termination of employment are generally void as against public policy.

All jurisdictions only allow restraints to be enforceable to the extent they are reasonable and necessary to protect the employer’s legitimate business interests. Legitimate interests of the employer which are capable of protection include the employer’s trade secrets, confidential information and goodwill of the business.

In all jurisdictions, where a restraint attempts to stop an employee from working for someone else, it must only be for a reasonable period of time, in a limited geographic area and for restricted activities (for example, working for a direct competitor). This is due to the recognition of the law that a person must be free to earn a living, which exists in tension with the wish of the employer to protect its interests. In Ireland in particular, there is a specific constitutional right to earn a living which must be considered when determining the reasonableness of a restraint.

The panelists all agreed that courts are less likely to enforce non-compete clauses than non-solicitation clauses given their ability to restrict someone’s earning capacity, with non- solicitation clauses often deemed sufficient to protect the interests of the employer against the leaving employee.

Another option discussed and used relatively commonly in the UK, Ireland and Australia, is to place an employee on a period of gardening leave, during which the employer will continue to pay the employee their salary but direct them not to attend work for some or all of the period. While this does not amount to a restraint of trade it may have the same effect because the employee is restricted from working for a competitor.

While the UK, Ireland and Australia rely on case law and examination of the facts and

circumstances of each case to determine what is reasonable, the civil law countries of Germany and Italy have more codified rules about how long a restraint is able to be enforced following termination of employment.

In Germany, a non-compete clause will only be enforceable as long as it protects a legitimate business interest of the employer and the restriction cannot exceed two years after the termination of the employment relationship.

In Italy, the duration of a non-competition covenant is restricted to a limit of five years for executives and three years for all other employees, and the courts will automatically reduce the duration if the covenant exceeds these limits.

Restrictive Covenants around the World: Requirement for Consideration

Interestingly, the common law jurisdictions of Australia, England and Ireland do not require specific consideration to be paid to an employee in order to make a reasonable restraint enforceable. Where the restraints are contained in the employment contract, the salary paid to the employee is deemed to be sufficient consideration. However, sometimes the employer and employee may agree for the employer to pay the employee an additional amount in consideration for further post- employment restraints that were not set out in the employment contract.

This contrasts with the civil law jurisdictions of Italy and Germany, where specific consideration is required to make restraints enforceable.

In Germany, the employer is obliged to pay compensation to the employee, amounting to at least 50% of the employee’s total annual remuneration, including bonuses and commissions for the period of the restraint.

In Italy, for non-competition restraints to be valid, compensation is normally between 15% and 30% of annual salary paid for the period of the restraint.

Remedies

The most common remedy sought by employers dealing with a breach of a restraint clause is to seek an injunction (usually on an interlocutory basis) to restrain the former employee from acting in a way that breaches the restraint of trade clause. After the interlocutory injunction, if the case has not been settled, it proceeds to a more formal hearing. Normally, new employers are part of these proceedings, and frequently the funders of the litigation.

Springboard injunctions are the most common way of enforcing restrictive covenants in the UK, as they help mitigate the unfair headstart which the employee obtains over competitors by using the employer’s confidential information.

Temporary injunctions can also be granted to prevent breaches while the case is in progress. While it is almost impossible to stop an employee from working for someone else, this remedy effectively does what a confidentiality clause in a contract would do: it stops the employee from using confidential information once the employee has left the organisation.

All panelists agreed that restrictive covenants around the world are generally settled by injunction and/or a Deed or undertakings, as formal hearings are expensive and uncertain for all involved.

In Germany employers are permitted to include a penalty clause in the employment contract, so that if there is a breach of a restraint, the employee must pay the penalty to the employer.

In Italy the employee must return the money that was paid to them as consideration for the restraint to the employer, and if there is also a penalty clause in the employment contract, they must pay the penalty as well. When the future employer is a party to the proceedings (as is usually the case), it will usually pay the penalty on behalf of the employee, as they are frequently the party obtaining the greatest advantage in the new employee joining their business.

Restrictive Covenants around the World: Gathering Evidence

In terms of evidence gathering, in the UK and Ireland it is possible under the terms and conditions of an employment contract to monitor the employee’s devices to see whether they are acting in breach of a restraint or misusing confidential information of the employer while they are still employed, but care needs to be taken not to infringe the employee’s privacy.

In Italy there are very clear restrictions in relation to the employer accessing employees’ data on their devices. Therefore, it is important to have in place a policy that allows the employer to process and monitor the employee’s electronic devices, always making sure the employee is informed about this. In the absence of this policy and communication, the employer will not be able to access any devices assigned to the employee.

Top Tips Globally

• Careful drafting is required to protect employer interests
• Have in place the right policies that will allow you to immediately respond by placing the employee on gardening leave, cutting off access to confidential information, and allowing the employer to trawl for evidence from the employee’s devices.
• Update restraints where there are significant changes to the business or the role of the employee, both of which can have an impact on the nature of the employee’s relationships with contractors and suppliers and the access to confidential information the employee has.
• Draft and implement policies in relation to confidentiality and employee monitoring.
• If permitted in your jurisdiction, penalty clauses are an effective deterrent for employees breaching restraints and misusing confidential information.

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