In this edition, we look at five recent cases related to confidential information, restrictive covenants and TUPE:
- Vestergaard v Bestnet
- Ashurst Rowan Financial Planning v Hall
- Romero Insurance Brokers v Templeton
- I Lab Facilities v Metcalfe
- Bangura v Southern Cross Healthcare
Vestergaard v Bestnet: Breach of confidence requires knowledge
All employees have a legal obligation to keep their employers' confidential information secret. In respect of "trade secrets", this duty continues after termination of employment. As confirmed by the Supreme Court, employees cannot be in breach of that duty unless they actually knew or were told that the information in question was confidential.
In Vestergaard v Bestnet a group of employees resigned from the ex-employer to set up a competing business and they developed a new product by misusing their former employer’s trade secrets. One of the employees who was the main Director of the competing company, had been employed in sales and marketing by Vestergaard and had never had access to, or knowledge of, the relevant trade secrets. In addition, she was unaware that the new product had been developed unlawfully.
The Court held that unless she knew, or ought to have known, that the actual recipients of the information were misusing it, she could not be held liable for breach of confidence.
Points to note –
- While their employment subsists, all employees have a legal obligation of confidentiality to their employer, whether it is written into their contract or not.
- Even after termination, employees still have a duty to not to misuse ‘highly confidential information’ i.e. trade secrets.
- Employers should always include an express confidentiality provision in employment contracts. To give such a clause effect, employers should make clear to employees what information they consider to be a trade secret. To avoid the employers enforcement problems in this case and for further protection of the business, employers should include post-termination non-compete restrictions in the contracts of senior sales personnel.
Ashurst Rowan Financial Planning v Hall: ‘Garden leave’ clause; interaction with restrictive covenant
Ashurst Rowan Financial Planning v Hall concerned an employee whose employment contract contained a clause allowing the employer, during his 6 month notice period, to require him to do all or part of his normal duties or no duties at all. It was expressly stated that any period spent on ‘garden leave’ would be deducted from the period during which any restrictive covenant would otherwise be in force. The relevant restrictive covenant prevented him from competing with the employer for a period of 6 months following termination of his employment.
The employee resigned and was asked to report directly to the CEO and work mainly from home on the handover of his client work during his notice period. The employee claimed that this period amounted to garden leave and accordingly the length by which he was bound not to compete was reduced. The High Court disagreed. His employers expressly said he was not on garden leave and, on the facts, he was still working.
However, the non-compete clause was found to be void because it was too widely drafted, preventing him from working in any capacity for any business or activity which directly competed with his ex-employers.
Points to note –
- A provision for ‘garden leave’ at the end of a contract of employment is often a more useful contractual tool for employers than restrictive covenants which are void unless the employer can prove otherwise. Both provisions can be used but, as this case shows, they must be carefully worded in order to be effective.
- Restrictive covenants will only be valid to the extent that they protect ‘legitimate business interests’. These may include ‘trade connections’ which in turn may include ‘the names of customers and the goods which they buy’. Again, they must be very carefully worded as, if and when they are needed, they are likely to be challenged in court.
Romero Insurance Brokers v Templeton: 12 months' non-solicitation restriction upheld
Where an employee is constructively dismissed, the employer will be in repudiatory breach of the employment contract and so will have no right to enforce a contractual restrictive covenant.
Is it constructive dismissal to invite the employee to a meeting to warn him that a proposed restructure would put him at risk of redundancy and then ask him not to come into work nor contact any clients? In Romero Insurance Brokers v Templeton, the High Court held that it was not.
In this case, the outcome of the meeting was that the claimant elected to negotiate a redundancy package including the sale of his ‘book’ of business. In those circumstances, the employer had acted reasonably and was not in serious breach of contract.
This meant that the Court could go on to consider whether a 12- month non-solicitation covenant was valid. The restriction prevented the claimant from seeking to procure orders from customers with whom he had had dealings over the previous 6 months. The court accepted evidence that a 12-month restriction on individual brokers was common in the insurance broking business and upheld the covenant.
Points to note –
- An employee can only claim constructive dismissal if his employer has ‘clearly shown an intention to abandon and altogether refuse to perform the contract’.
- A non-solicitation covenant is more likely to be upheld than a non-compete covenant but acts of solicitation may be harder to identify.
I Lab Facilities v Metcalfe: Who are ‘affected employees’?
Under the TUPE regulations, the transferor must consult with ‘affected employees’ in good time before the transfer takes place. Each individual employee is entitled to compensation if there is a failure to consult, for which both transferor and transferee are jointly liable.
In I Lab Facilities v Metcalfe, one part of a business (Part A) was transferred as a going concern but the other part (Part B) was closed down. The EAT held that the employees in Part B, who were all made redundant, were not ‘affected employees’ and need not have been consulted prior to the transfer.
It is possible for employees to be ‘affected employees’ even if they are not assigned to the relevant undertaking or organised grouping of employees that is transferring. However, in this case, the transfer had no direct impact on the employees in Part B. Their jobs were in jeopardy because that part of the business was closing down, not because of the proposed transfer.
Point to note –
- Unhelpfully for employers, the EAT said that it cannot be determined with complete certainty whether an employer is in breach of the obligation to consult until after the relevant transfer has occurred. In this case, the Part B employees were initially consulted because the original plan was to sell off both parts of the business together. However, when the plan changed, they ceased to be ‘affected employees’.
- As liability for compensation is joint and the tribunal cannot apportion it between transferor and transferee, transferee employers could find themselves liable for the whole amount. The transferee should therefore ensure that the contract with the transferor contains adequate indemnities to cover post-completion claims.
Bangura v Southern Cross Healthcare: Employee with dismissal under appeal at time of transfer?
In Bangura v Southern Cross Healthcare, the EAT considered another area of uncertainty connected with the TUPE regulations. Unfortunately, the EAT's decision does nothing to help the purchaser of a business in trying to assess what liabilities they assume.
If an employee is dismissed and appeals the decision, the general law is that the dismissal is effective unless or until the appeal is successful, in which case the dismissal simply ‘disappears’ and the employee is to be treated as if it had never happened.
This case concerned an employee who was dismissed for misconduct prior to a TUPE transfer with the resulting appeal against dismissal still pending at the date of the transfer. The EAT confirmed that the normal rule still applies. So, if the appeal is unsuccessful, the dismissal stands. However, if the appeal is successful, the employee is treated as if they were never dismissed and their contract and all the legal obligations thereunder, pass automatically to the transferee.
Point to note -
- Responsibility for dealing with any such outstanding appeal remains with the transferor employer, therefore the transferee will need to be sure that they ask for the correct ‘employee liability information’ pre-transfer (as TUPE entitles them to do) so that they can be aware of any potential obligation that they may be taking on.