Companies are increasingly using contracts to protect themselves from former employees.

Earlier this month, Dresdner Bank put a price of $190m (£128m) on the heads of 300 staff at Wasserstein Perella, the investment banking boutique it is set to acquire. The sum - which works out at about $600,000 a head - has been set aside to stop the Wasserstein employees from walking out.

It was not long ago that employers were more interested in cutting their workforce than hanging on to it. How times have changed.

But a surging economy has created a skills shortage in key sectors such as law and information technology while a shrinking workforce has put pressure on many businesses. Losing employees, particularly those with special expertise or access to confidential information, can prove a body blow for some companies.

The result is that more employers are taking action to protect their rights. There are a number of ways they can do this. One option is to shower key employees with long-service bonuses and share-option schemes. Another is to crank the legal machinery into action.

In the absence of express provisions, the law offers scant protection to employers once an employee's contract has been terminated. A court will not impose any restriction on an employee's right to poach colleagues or clients.

Similarly, in the absence of express provisions, a court will not protect confidential information (customer lists, marketing strategies or price lists) to which the employee might have had access. It will only provide protection for a very narrow category of information that falls within the definition of a trade secret - normally consisting of highly sensitive items such as secret formulas.

The lack of implied protection and the uncertainty over the precise line between confidential information and trade secrets emphasises the importance of drawing up suitable contracts.

One way around these problems is to include "post-termination restrictive covenants" in contracts. These covenants take a variety of forms. Their objective is usually to prevent a former employee from divulging confidential information, working for a competitor or enticing away customers or employees.

Certain basic criteria must be satisfied for a post-termination restrictive covenant to be enforced.

The employer must show it has a legitimate interest to protect - such as confidential information, a client base, goodwill or key employees. Moreover, in order to enforce the covenants, an employer must show that those covenants are necessary and reasonable.

The covenants can be drafted in a number of ways, typically with reference to key employees or clients with whom the employee has had close contact.

Restrictive covenants are usually limited to between six and 12 months after the end of the employment.

What is reasonable depends on circumstances. The courts attempt to balance the employer's right to protect its legitimate interests against the employee's right to earn a living.

For example, where an e employer, wishes to protect its client base, a court will not enforce a non-competition clause that bars an employee from an entire industry if a non-poaching clause is sufficient to prevent approaches.

The employer has a number of options if the employee fails to comply with the terms of an enforceable restrictive covenant. It can sue for damages if it can prove loss, or can ask for an injunction to prevent the former employee dealing with certain clients or working in a particular area.

If the employer is concerned about the flight of confidential information, it can apply for a search order. This entitles the employer to enter and search the former employee's home and confiscate documents or information acquired in breach of contract.

Such tactics can be extremely effective from an employer's point of view. Even if it gains only a temporary injunction against a former employee who is intent on becoming a competitor, the results can be devastating. Clients, suppliers, and financial backers could lose confidence at a crucial time in the new business's development.

But employers must be aware that if they dismiss employees without notice in breach of contract, even the most watertight contracts will be unenforceable. This is because if the employer has broken the terms of the contract, it has no right subsequently to rely on selective parts of it to enforce its rights.

If the employer has no restrictive covenants in the contract of employment or cannot enforce them because it has dismissed the employee without justification, it can attempt to negotiate some form of restraint as part of any termination pay-off agreement.

Given the uncertainty over the enforceability of covenants contained in contracts of employment, a more subtle form of restriction has become popular: the "garden leave" clause.

This requires employees to give a long period of notice which they must serve at home.

In this way, employees are precluded from taking other employment during the notice period. Employees remain bound by their duties of loyalty and obedience during what is, in effect, an enforced holiday.

The employer's objective is to ensure that employees lose contact with customers and cease to have access to time-sensitive information long before the employment ends.

During the notice period, employees continue to receive their salary and other benefits. If these are not continued, the employer risks claims for breach of contract.

In considering whether to uphold such a clause when employees want to leave before the notice period expires, the court must balance two factors: the danger posed to the employer's business by a breach of the clause, as opposed to the problems employees might face if their skills are impaired during a period of enforced idleness.

Some employers prefer not to rely on legal documents. Instead, they offer positive incentives for remaining with the company, such as bonus schemes that only apply if the employee remains with the company until the year end.

Another incentive is a scheme under which the bonus is calculated by reference to pre-determined targets, but is paid six months in arrears - provided the employee has not left the employment or served notice.

The good news for employees in an increasingly competitive market is that your prayer to be put on garden leave or to be offered a big cash incentive to stay stands the best chance in years of being answered.

First published in the Financial Times on 3 October 2000.