New Zealand: Protecting confidential information when employees leave

Last Updated: 28 March 2014

"I'm leaving" are the words that any employer dreads to hear from a key employee. Next comes the worry of how to make sure that business doesn't walk out the door with the departing employee.

An organisation's confidential information, such as trade secrets, client and supplier information, market strategies, price lists and other financial information are major strategic assets. They provide businesses with a competitive edge and can take years to develop. The protection of these assets against misappropriation by former employees is therefore of crucial importance.

Employers should take time to consider what information is of value to the business, who has access to that information and whether that information is secure.

There are a number of steps employers can take to protect valuable information:

  1. Draft employment agreements carefully.

While it may seem cynical to contemplate the end of the employment relationship before it has even begun, the measures and terms put in place at the outset will prove invaluable when an employee does leave.

If drafted correctly, protection clauses will guard against the potential harm inflicted by a departing employee.

Employment agreements for all employees, whether senior or junior, should contain confidentiality and intellectual property clauses. The confidentiality clause should define the information the employer is seeking to protect and include a requirement to return information on termination of employment. The intellectual property clause should state that all intellectual property created belongs to the employer and that future rights are assigned to the employer.

The employment agreement should also contain a term which gives the employer the ability to direct the employee not to report for work during his/her notice period. This is commonly called "garden leave" and is an effective way of disabling a departing employee. While it does mean that the employer is effectively paying the employee to sit on his/her hands, it removes the employee from the industry and from on-going access to confidential information. It also provides an opportunity to acquaint clients and contacts with the replacement employee and generally prepare for the former employee's re-entry into the industry.

Clauses which restrain an employee from competing with you for a period of time, or from soliciting or dealing with your clients can also be an effective way to protect the business interests following the departure of a key employee. However, these types of clauses will only be enforced to the extent that they are reasonable and need to be very carefully drafted.

  1. Treat confidential information as confidential.

If an employer truly wants to be able to rely on the protective measures contained in the employment agreement, workplace policies relating to the protection of the business interests and confidential information need to be up to scratch.

It is no good recording how important certain information is, if it is then splashed all over the workplace for everyone to see. Confidential information should be communicated in a manner that leaves the recipient in no doubt that the information is confidential.

Employees should be made aware that the organisation's clients remain its clients, despite an employee's every day contact with particular clients.

  1. Enforce the employment agreement.

Once an employee has left the business, the former employer may be able to restrict his/her activities by seeking to enforce a restraint of trade and/or non-solicitation provision if such provisions are contained in the employment agreement.

If the employer has reason to believe the employee has removed client lists and/or other confidential information from the business, there are a number of legal remedies which can be pursued – for example, seeking an injunction preventing the employee from acting in breach or suing for breach of contract where the breach has already occurred.

It is important to maintain awareness that an organisation's biggest asset (its key employees) can also be its biggest liability, should they decide to move on.

If your key employees are already well entrenched in your business without any of the protective measures outlined above, it would be worthwhile thinking about putting safeguards in place now.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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