Protect your confidential information

The tide is turning against employees who leave companies and take sensitive information with them. Properly worded contracts can help that information remain private. LUCINDA SCHMIDT reports.

Losing a skilled employee is always bad, but it is disastrous if they take your confidential client lists to a rival. Recent court decisions give employers some avenues to stop this happening.
By Lucinda Schmidt

It’s a blow most business owners face at some stage. One of your best employees is leaving, taking with them a brain stuffed full of confidential information and client details.

If there’s nothing spelt out in their employment contract, don’t despair. The common law offers some protection, including a duty for staff to act in good faith. That means they can’t spend their last few weeks stealing clients, enticing other staff members to join them or copying price lists.

The common law also prevents them from disclosing your company’s confidential information even after they’ve left. This covers trade secrets such as prototypes, computer programs, recipes, specifications, pricing margins and marketing strategies.

But here’s the bad news. The duty to act in good faith ends the minute they stop being employed by you. And the duty to keep confidential information secret does not cover what lawyers call “know-how” – the skill, knowledge and experience the employee has built up working for you.

This is where a few well-drafted clauses in the employment contract can give you a lot more protection. Known as “restraint of trade” clauses, they typically require an ex-employee not to entice customers or other staff to their new business, for a set period.

They usually re-state the common law obligation to keep confidential information secret, and often identify specific types of information. Senior staff might also have a clause that they cannot work for a competitor for a certain period.

Until recently, these clauses acted more as a deterrent rather than something to confidently sue on. Courts don’t like to stop people using their skills to earn a living, and have often sided with the employee to strike out restraint-of-trade clauses as being unreasonable.

But recent cases in several Australian states, where restraint clauses were enforced, show that the tide may be changing. The key thing is drafting. This is not an area to download a quick pro-forma from the internet and whack it into all your staff contracts.

The golden rule, according to intellectual property lawyer Paul Kirton, a principal at Macpherson+Kelley, is that the restraints must be reasonable. And they must be designed to protect the employer’s legitimate business interests.

Three things are key to showing the clause is reasonable: how long the restraint lasts (typically three, six or 12 months); the geographical region covered (such as a particular suburb or the east coast of Australia) and the activities it limits.

Even though you might be devastated that your top salesperson is leaving, a clause that they can’t work for a competitor anywhere in the world in any capacity for 10 years is not worth the paper it’s written on.

Far better to have a more limited, reasonable restraint, perhaps preventing them from working for a competitor in your town, or soliciting clients or staff, for six months.

The other important way to protect yourself is to act promptly on the day your employee resigns – whether or not they have a restraint of trade clause in their contract. If there has been any wrongdoing, you need to gather evidence fast.

Peter Vitale, principal of employment law specialists CCI Victoria Legal, says the first thing to do is give the employee a written reminder of their confidentiality obligations.

Next, do a search of their computer, checking emails and any unusual activity such as sending large volumes of files home or to be printed. If possible, check the call record on their mobile phone.

Vitale says that if you do have some concerns after carrying out these checks, it might be worth writing to their new employer advising them that you believe your company’s rights have been breached, and explaining how.

Another potential protection, says Kirton, is to make the staff member serve out their notice period. He says that often companies pay out senior staff and boot them out the door the day they resign, but it might be better to keep them on (but doing a job with no client contact or access to confidential information), to buy you a few extra weeks to prepare for their departure.

“The impact of a senior employee leaving is often greater for small businesses than for big companies,” Kirton says. “If a sales rep covers the whole of Victoria, or your R&D team is just a couple of people, the effect can be devastating. But it’s not hard to get some protection in place.”


Protection checklist

  • Have labels or passwords on commercially sensitive information.
  • Restrict access, for example secure storage in a designated area.
  • Tell staff which information is confidential and that restrictions apply to its use or disclosure.
  • Make sure all diaries and mobile phones are company property, returnable when staff leave.
  • Make sure your employment contracts refer to confidential information and include an individually tailored restraint of trade clause.
  • Get contractors to sign a confidentiality deed.
  • Have a formal policy on use of confidential information, including its use at employees’ homes.
  • Maintain contact with your customers.

Source: Paul Kirton, principal, Macpherson+Kelley


For further legal updates, see our Growth Resources, Operations section.



Notify of
Inline Feedbacks
View all comments