The importance of a set of well-drafted post-termination restrictive covenants
By DLA Piper | Wednesday, 01 Dec 2021
Movement of talent is common in Hong Kong and often without notice. A set of bespoke, well-drafted post-termination restrictive covenants can protect an employer’s legitimate business interests and deter breaches by employees and competitors alike. However, what should a well-drafted restrictive covenant look like?
Hong Kong Courts are often reluctant to uphold non-compete provisions. The position in Hong Kong, as in many common law jurisdictions, is that covenants in restraint of trade are unenforceable unless they can be shown to be reasonable between the parties and in the public interest. In such case, what can an employer do to protect its interests?
Recent case: BFAM Partners (Hong Kong) Ltd v. Gareth John Mills & Segantii Capital Management Limited
What’s worse than a departing employee? A departing employee who also takes your other employees, customers or suppliers with them or sets up a business in direct competition with yours. The Hong Kong courts have long recognised that employers may need to impose certain obligations on their former employees to protect their legitimate business interests, and have hence allowed for the enforcement of certain post-termination restrictions. These covenants may be drafted in different ways and may purport to restrict different types of activities, including poaching of employees, soliciting of clients and/or suppliers, joining a competitor and/or establishing a competing business.
Of course, employers generally also have the option of imposing the same kinds of restrictions during the period leading up to an employee’s departure (i.e. by placing the employee on garden leave and limiting their activities during such period, including their dealings with clients and other employees). As such, post-termination restrictions could be considered as more of a top-up protection. It is however important to note that having enforceable post-termination restrictive covenants is particularly important in Hong Kong, as these will be the only protection available to an employer if an employee exercises their statutory right to buy out their notice period, which is often funded by the new employer.
Case law has shown time and time again that good drafting of post-termination restrictive covenants is crucial in order to ensure their enforceability. Specifically, restraints which are reasonable and appropriately limited and which allow for severability have better prospects of enforceability.
Reasonableness
Assuming you have legitimate business interests to protect, a post-termination restriction will generally only be enforceable if you can show that the relevant covenant is a reasonable measure to take that goes no further than is necessary to protect such interests. In practice, this generally means that the duration of the restraint, the geographical scope of the restraint and the types of activities sought to be restrained should all be drafted in a way that reflects what is reasonable in the circumstances having regard to, for example, the employee’s position and responsibility, their level of seniority, the extent to which the employee will have access to the employer’s confidential information and the types of confidential information to which an employee will have access.
In the recent case of BFAM Partners (Hong Kong) Ltd v Gareth John Mills and Segantii Capital Management Limited, the Hong Kong High Court considered the extent to which the relevant former employee had access to the employer’s confidential information and the types of confidential information to which the former employee had access, and ruled that the employer could legitimately claim protection by way of a six-month non-compete. The court found that there was sufficient evidence that the former employee was privy to and accessed confidential information via, among others, the meetings the former employee attended, the employees that were directly reporting to him and the seniority and responsibilities of the former employee. The relevant types of confidential information were also considered by the court to be of a nature that could not be adequately protected by a confidentiality clause, which included (i) certain information on the employer’s business objectives, operational needs and trading strategies; (ii) information on how the employer’s technologies were secured and tailored towards its strategies; (iii) the source codes in relation to certain tools utilised by the employer, including a bond marketing tool and bonus calculation tool; and (iv) remuneration and compensation information of other employees.
In addition, the reasonableness of a covenant will be judged at the time the covenant is given. This can often be an issue for long-serving employees who may have been promoted or had their roles changed since they first signed their employment contract, which contained the post termination restrictions. In the context of their original role, the restraints might not be reasonable, even though, if judged against their current position, they would be. On this basis, the best approach would be for employees to enter into fresh restraints whenever they are promoted or their role changes which are appropriate for the employee at the relevant time, taking into account their new position and duties.
Severability of the covenant
Traditionally, where a covenant has been drafted in a way which is unnecessarily wide considering the employer’s legitimate business interests which need to be protected, the entire clause will be struck out and held to be unenforceable. However, case law has developed to allow an otherwise unreasonable (and hence unenforceable) restrictive covenant to be “saved” by a court in certain circumstances.
The UK Supreme Court confirmed in its ruling in Tillman v Egon Zehnder (handed down in 2019) that parts of a post-termination restrictive covenant could be severed to ensure the enforceability of the rest of the clause (if reasonable), provided that (i) the provision to be severed is capable of being removed without adding to the remaining wording; and (ii) the removal of the severed provision will not generate any major change in the overall effect of all the post-termination restraints in the contract. While this case is a UK case, UK case law is likely to carry persuasive weight in Hong Kong, and Hong Kong courts may follow the approach affirmed by the UK Supreme Court.
In practice, in order to ensure that a covenant is drafted in such a way so as to allow for certain provisions to be severed if deemed unreasonable, this will often involve, for example, including various sub-paragraphs within the covenants, each covering a specific type of activity, which would make it easier for a court to sever specific part(s) in order to rescue the relevant restriction if needed.
Conclusion
In summary, it has been consistently shown that well-drafted post-termination restrictions which are reasonably necessary to protect the employer’s legitimate business interests can and will be enforced. In Hong Kong, it is particularly important to ensure the enforceability of post-termination restrictive covenants given the statutory right of employees to buy out any notice period. To ensure enforceability, employers should take a tailored approach when drafting the restrictions, as reasonableness will be determined taking into account the circumstances of the relevant employee, and there is no one-size-fits-all approach. Ensuring that different parts of a covenant can be severed may also allow an otherwise unreasonable post-termination restriction to be “saved”.
Written by Wendy Wong (Of Counsel of DLA Piper’s Employment practice in Hong Kong) and Jason Lo (Employment practice, DLA Piper Hong Kong)
How does Human Resources professionals act on Environmental, Social and Governance (“ESG”)?
Professional Employer Organization: Pros and Cons in 2021
Job Index: HR professionals worst impacted amid COVID-19 and market volatility