There will be times when an employee or contractor leaves your business and you find out later that several significant customers have followed them to their new employer or business. The key questions is what can you do to protect your business in these situations?
Departing employees
The starting position is that after your employee ceases to work for you, they are largely free to compete with you for customers, including your existing customers. However, this general rule is subject to a number of important exceptions.
The first is that your employee must not take any actions in ‘preparation’ for their departure while they remain employed by you. If your ex-employee has taken steps prior to leaving that are against your interests, then you will be able to recoup from them any benefit or gain they may later make from those actions.
Secondly, your ex-employee must not use any confidential information or commercial opportunities they were exposed to while employed by you to benefit themselves after ceasing to work for you. The classic example here is when an ex-employee takes a copy of your customer list or other confidential financial information.
Finally, your ex-employee will be bound by any valid post-employment ‘restraint’ provisions that they may have agreed to in their employment contract. A well-drafted employment contact with appropriate restraint provisions will ultimately be your best defence against customer poaching by your ex-employees.
Whilst post-employment restraints were, at one time, usually seen only in employment agreements for executives, they are becoming increasingly common in modern employment agreements at all levels. This is a reflection of the fact that more and more employees are gaining exposure to valuable customer relationships and IP. As such, post-employment restraint enforcement and disputes are also increasing.
That said, if a customer (for whatever reason) has already decided to cease using your services before deciding to take their business to your ex-employee, the fact that the client then takes their business to the ex-employee may not amount to solicitation. We strongly suggest that you carefully review the restraint clauses in your employment contracts to ensure they will enable you to take decisive enforcement action, when necessary.
Contractors and consultants ending their engagement
Consultants or contractors to your business can also do significant damage after the end of their engagement, particularly if they had customer contact or significant access to customer information while working with you.
The general rule here is that the consultant or contractor is free to compete with you in the market provided that they do not breach any obligations of confidentiality or ‘non-compete’/’non-solicitation’ clauses in their contracting agreement. Accordingly, this is another scenario where it is vital to get the paperwork in order from the outset to ensure that your business is protected.
At a minimum, your contracting agreement with the consultant or contractor should:
- Set out the nature of the work they are doing, and the duration of the engagement;
- Deal with ownership of the work product they produce (you want your business to own the work at the end of the day, not them);
- Detail strict obligations to maintain confidentiality;
- Contain a clear and professionally-drafted non-compete clause that prevents them from stealing your customers; and
- Include a non-solicitation clause that prevents them from stealing your employees or contractors.
