Legal update: Post-termination restrictions in employment contracts

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By Andrea Randall, partner, Gall Hong Kong

Appropriate and reasonable post termination restrictions (“PTRs”) in employment contracts are an effective way to restrict the post-termination activities of a departing employee with the aim of protecting the employer’s business.

The Court will not fashion relief to an ex-employer who has not troubled to incorporate PTRs in the employment contract to protect its business interests.

It follows that if an employer is concerned over the post-termination activities of its employees, it should consider whether to incorporate PTRs in its employment contracts. Courts in Hong Kong have readily enforced PTRs for the benefit of ex-employers so long as it can be shown that the PTRs in question are (a) reasonable in the interests of the contracting parties and (b) reasonable in the interests of the public.

Typical PTRs
Most commonly, PTRs are used to restrict a departing employee for a specified period from:-

• joining competitors;
• poaching employees;
• soliciting clients or customers; and/or
• dealing with clients or suppliers.

Depending on the departing employee’s connections to clients and suppliers, Courts could be persuaded that sensible safeguards are necessary to protect an ex-employer’s customer connections and confidential information. In this regard, it is well accepted that customer connections and confidential information are valid and legitimate commercial interests justifying PTRs.

Enforceability of PTRs
The question of the enforceability of PTRs is now fairly settled. There are, broadly speaking, three key principles as follows:

• First, the Court will decide what the PTR means, when properly construed.
• Second, the Court will consider whether the employer has shown a legitimate interest to protect in relation to that employee’s employment. Employers’ interests which are capable of protection by a PTR falls into two main categories: customer connection and trade secrets and/or other confidential information.
• Third, if the existence of the protectable interest is established, the PTR must, in order to be upheld, be shown to be no wider than is reasonably necessary for the protection of that interest. The assessment of reasonableness will be carried out from the perspective of reasonable persons in the parties’ position as at the date the employment contract was entered into and that reasonableness must equally exist at the date upon which the PTR is sought to be enforced.

If a PTR is held to be unreasonable, it will be struck down and will not be enforced unless the offending parts can be severed by applying the “blue pencil” test. The Court cannot enforce a restriction of lesser extent which would have been reasonable. However, if only part of a PTR is unreasonable, individual words or phrases may be ignored, so permitting a reasonable call to stand.

Importance of seeking legal advice in relation to PTRs
For Employees: Legal advice over the enforceability and scope of the PTRs should be sought prior to joining a competitor. In case of a breach of an enforceable PTR, an employee may be liable to a claim of breach of contract and in some cases may even be restrained by a court injunction from joining a new employer.

For new Employers: Legal advice over the enforceability and scope of an employee’s PTRs should be sought prior to offering the employee a job. An ex-employer could potentially bring a claim against a new employer in connection with their involvement in wrongful conduct by the former employee. If the legal advice obtained is to the effect that the PTRs are likely to be enforceable, the new employer should proceed with caution.

For ex Employers: An ex-Employer should seek robust legal advice on enforceability of the PTRs before taking any action. Where it suspects that a departed employee has acted in breach of the PTRs, it should seek further legal advice to understand whether the employee’s conduct is in fact in breach of the PTRs and if so, whether to commence legal proceedings. Where an ex-employer has commenced legal action and is unsuccessful in seeking the remedies it has sought, the Court will likely order the ex-employer to bear the ex-employee’s and/or the new employer’s legal costs in defending the action

Guidelines for drafting
The following should be kept in mind when drafting PTRs:-

• The onus is on the party seeking to rely on the PTR to show that the PTR is reasonable and ought to be enforceable.
• Any ambiguity or uncertainty in the language of the PTR may give rise to a challenge that the PTR should be construed against the party which drafted the PTR.
• When drafting a PTR, attention should be paid to the specific position, seniority and influence of the employee, as well as the connections and the shelf-life of the confidential information and knowledge retained by the employee.
• Consideration should be given to reducing the restrictive period of the PTR with any period of garden leave served.

The language of the PTR should be clear, precise and reasonable, in particular as to duration and geographic scope.