08 Oct 2013

ARE POST-TERMINATION RESTRICTIONS WORTH THE PAPER THEY’RE WRITTEN ON?

Authored by: Jamie Liddington

ARE POST-TERMINATION RESTRICTIONS WORTH THE PAPER THEY’RE WRITTEN ON

In this article, Jamie Liddington addresses some of the questions which employers frequently pose when dealing with post-termination restrictions.  A common fear among employers is the risk that senior employees (in particular, those in possession of confidential information or who have formed close client or customer connections) leave to join a competitor or set up their own competing business. While Federal Labour Law No.8 of 1980 (as amended) (the “Labour Law”) includes provisions which seek to assist employers in trying to prevent this risk from materialising, it remains a vexed topic among employers as the application of the Labour Law in relation to this topic often gives rise to uncertainty.

In brief:

  • When an employee performs a role which allows him to become acquainted with confidential information, restrictions can be incorporated into contracts of employment as a way of seeking to control an employee’s actions after the termination of the employment relationship.
  • Clear and precise drafting of any clause is crucial in order to prevent a court from striking it down as void. A court will consider whether the type of restraint is necessary to protect the legitimate business interest that the employer is seeking to protect.
  • Where an employer suspects that an ex-employee has acted or will act in breach of an express contractual restriction, the remedies available to the employer are not extensive.
  • Whilst the Labour Law can leave some employers feeling that the legislation does not adequately address all the risks faced in the modern marketplace, employers do have some options to deter former employees from acting in a manner which is likely to harm the employer’s business.

1.      WHAT IS THE LEGAL POSITION ON RESTRICTIONS? 

Article 127 of the Labour Law provides that where an employee performs a role which allows him to become acquainted with confidential information, the employer may put in place an agreement or include in the employment contract a provision which prevents an employee from working with a competing business after termination.
 
Article 909 of the Civil Code further provides that any such agreement shall not be valid unless it is limited in time, place and type of work to such extent as may be necessary to protect the lawful interests of the employer.
 
Accordingly, restrictions can be incorporated into contracts of employment as a way of seeking to control an employee’s actions after the termination of the employment relationship. Clauses preventing defined activities after termination are generally referred to as post-termination restrictions (or simply “restrictions” for the remainder of this article). The most common restrictions are “non-compete”clauses which prevent an employee from taking on a new role which places them in direct competition with the employer.
  
2.    WHAT DO WE NEED TO DO TO PROTECT OUR BUSINESS?
 
Firstly, restrictions cannot be implied. In the absence of an agreement in writing (which may contain one or more restriction(s)), the employee will not be restrained after his employment. It is crucial that the contract of employment (or a separate contractual agreement) contains an express clause which sets out the nature and extent of any obligations or duties which are to apply both during employment and post-termination.
 
Whilst restrictions are lawful, they must be “reasonable”.  Reasonableness is determined in two stages:
 
Firstly, there must be a legitimate business or legal interest to protect. The most common legitimate business or legal interests which employers seek to protect are:
 
-       trade connections;
-       goodwill; and
-       trade secrets / confidential information.
 
Secondly, the clause must extend no further than is reasonably necessary to protect that legitimate business or legal interest.
  
3.    WHAT DOES THAT MEAN IN PRACTICE?
 
As stated above, restrictions must afford no more than adequate protection to the employer. Therefore, clear and precise drafting of any such clause is crucial in order to prevent a court from striking it down as void.
 
Which ‘tool’ should be used for the job?
 
The first issue that a court will consider is whether the type of restraint is necessary to protect the legitimate business interest that the employer is seeking to protect. For example, if an employer seeks to protect its clients from being poached by the ex-employee, it may not be necessary to have a total non-compete restriction. It may be sufficient protection for the employee simply to be restrained from working with the clients of his former employer (i.e. a non-dealing restriction). There are, however, times when a non-compete clause will be the only way to achieve the desired effect.
 
How far can we push it?
 
An employer may wish to restrict the geographic area in which an employee is able to work. Generally, the wider these areas are, the less likely a clause will be found to be reasonable and hence, enforced by the courts. However, the context is always important.
 
Whilst at the same time trying to restrict the geographical area in which an employee is prevented from working, a clause may also restrict the specific type of work that can be done.
 
Finally, a post-termination restriction must be reasonable in terms of time. The longer the period of time a clause covers, the more difficult it will be to justify.
 
4. WHAT CAN WE DO IF AN EX-EMPLOYEE BREACHES A RESTRICTION?
 
Where an employer suspects that an ex-employee has acted or will act in breach of an express contractual restriction, the remedies available to the employer are not extensive.
 
In theory, the most suitable remedy is an injunction (i.e. an order from the Court to restrain the ex-employee from acting in breach of the post-termination restraint). An injunction is a preventative measure as opposed to the alternative; waiting for the ex-employee to cause loss and then issuing a claim for compensation.
 
However, with the exception of the DIFC (which is outside of the scope of this article) injunctive relief is not provided for such matters in the UAE as the Courts do not have power to grant and enforce injunctions. That leaves the employer with only one option in terms of civil proceedings - a claim for damages.
 
When considering the merits of a claim for damages (i.e. compensation), a court will initially consider whether any post-termination restrictions are reasonable. The employer then faces the difficult burden of providing evidence to show that the employer has suffered direct and actual financial loss as a result of the employee’s breach of the post-termination restrictions.
 
Damages claims can be extremely expensive and should not be initiated without careful examination of the chances of success. Furthermore, unless there is very clear evidence to establish the full loss, it is likely that only a nominal award for costs will be made.
 
Can we take action against the new employer if they are controlling our ex-employee?
 
The new employer may also become a party to proceedings if he has knowingly encouraged the employee to breach his contract or otherwise act unlawfully. Under Article 64 of Federal Law No. 18 of 1993 (the “Commercial Transactions Law”), a business entity may not induce the employees or workers of another competitor so that they assist him in usurping the customers of that other business entity or so that they leave their employer’s service and enter into his service or disclose to him the secrets of his competitor. Article 64 of the Commercial Transactions Law goes on to provide that the appropriate remedy for these acts will be compensation.
 
What else can we do to prevent ex-employees causing harm?
 
It is clear that an ex-employer’s remedies are not extensive and taking enforcement action is a costly process which may not yield the desired results.  
 
There are two other main civil weapons in the employer’s armoury:
 

  • The first is the inclusion of a “garden leave” clause in the contract. A garden leave clause allows the employer to elect to lawfully instruct the employee to serve out his notice period from a place other than the normal place of work and to impose new conditions on the employee during that period (e.g. no contact with clients or customers).                                                    
  • The second is the inclusion of a liquidated damages clause in the contract. A liquidated damages clause sets out a pre-estimate of the likely loss which would be suffered by the employer in the event of a breach of a restriction. Where a liquidated damages clause exists, the burden shifts to the employee to prove that the amount claimed in the clause has not actually been suffered by the employer or amounts to a penalty clause (and is therefore unenforceable).

 
Perhaps of even greater concern to the ex-employee, Article 379 of Federal Law No. 3 of 1987 Concerning the Penal Code (the “Penal Code”) provides that an ex-employee may be sentenced to detention for a minimum period of one year and/or to a minimum fine of AED 20,000 if, by virtue of his profession, craft, position or art is entrusted with a secret and then divulges that secret in cases other than those permitted by law or uses it for his own personal interest or the interest of another person unless authorised by the confiding person to disclose or use it.  Employees may be deterred by the thought of criminal proceedings.  Criminal proceeding may also be brought against others conspiring in any crime and such actions are not uncommon in the UAE. Even if not successful, they are often time-consuming and stressful for those concerned.
 
Conclusion
 
Whilst the Labour Law can leave some employers feeling that the legislation does not adequately address all the risks faced in the modern marketplace, employers do have some options to deter former employees from acting in a manner which is likely to harm the employer’s business.
 
Prudent employers would be well advised to consider making what is a comparatively modest investment in fees at the outset of the employment relationship in crafting a solid contract of employment containing carefully drafted restrictions. The alternative can has been described as akin to burying your head in the sand and hoping for the best.  However, some employers prefer not to propose what some potential employees may regard as onerous terms in employment contracts due to a concern that it could deter good candidates from joining or elongate recruitment process.  Ultimately, the policy balance between protection and administration should be carefully considered by each employing entity, taking into account its particular circumstances, risk profile and strategic objectives.

This article, including any advice, commentary or recommendation herein, is provided on a complimentary basis without consideration of any specific objectives, circumstances or facts. It reflects the views of the writer which may, in some cases, differ from those of the firm, especially in the develop jurisdiction of the UAE.