The regulatory technology (RegTech) sector has gained rapid traction in recent years. Young RegTech companies seeking to differentiate themselves in a booming industry will only be as innovative as their employees. In Australia, these businesses are hiring in a highly competitive market and should be considering the steps they can take to retain the best talent and protect their ideas.
Employment agreements in the RegTech sector must be carefully balanced. Businesses want to attract dynamic and innovative employees but must ensure they are adequately protected during and at the end of the employment relationship, potentially discouraging employees from leaving and joining a competitor.
Below are 4 key employment considerations for RegTech businesses to retain their best employees and protect their ideas.
Keeping confidential information secure is of the utmost importance to RegTech businesses, particularly in smaller start-ups where employees may work for multiple employers (including for themselves). It is therefore imperative that employment contracts include an express contractual obligation to maintain confidentiality rather than simply relying on the equitable duty of confidence or implied contractual duty of fidelity.
A confidentiality clause in a contract of employment for a RegTech business should:
- use clear language to capture confidential information in hard and soft copy form and covering all information relevant to the business, products, clients, financials, intellectual property and business plans;
- include a requirement that an employee must return any confidential information in their possession whenever the employer requires and always on termination of employment (in addition to the return of all physical property belonging to the business); and
- ensure that the obligation to maintain confidentiality expressly continues beyond the end of the employment relationship.
Intellectual property protection is key for RegTech businesses to secure their innovations and ensure that they own anything developed by their employees during employment and can protect it using the law.
Employment contracts should contain well-drafted IP clauses that specifically vest and assign to the business all IP that an employee develops within the scope of their employment. A RegTech business may also want to consider including contractual obligations on its employees to cooperate with the prosecution or defence of its IP rights.
The drafting of IP clauses will be of particular importance in respect of employees who engage in other pursuits outside the scope of their immediate employment, to ensure individuals are not using information obtained during their employment to develop IP outside work for their own or a third party's benefit. Critical to this will be defining what work is within the scope of their employment. However, RegTech employers should ensure that they do not go further than necessary when seeking to define that scope, to avoid 'scaring off' talented staff. For example, it is unlikely to be appropriate to require part-time employees to assign rights in IP produced by them in their own time with their own materials. This may be a tricky balance to strike and merits consideration in each individual employment contract.
Notice of Termination
RegTech employers should give specific consideration to the length of notice in contracts for their employees. Statutory minimum notice periods are between one and five weeks, depending on length of service and an employee's age. However, an extended notice period provides an employee with confirmation that the employer is committed to the relationship, while also allowing the employer to implement transition arrangements should the relationship end.
In this day and age, it is likely that in a competitive industry employees are unlikely to remain with one employer for their entire career. In order to assist with finding a suitable replacement, RegTech employers should ensure that they have maximum flexibility in their employment agreements in the event of termination. Employers would be best placed if they have wide-ranging ability to require an employee to work alternative duties during the notice period, stop performing duties altogether (often called gardening leave) and not have any contact with employees or clients or terminate immediately and make a payment in lieu of the notice period.
The option of gardening leave has the further benefit of keeping an employee at arm's length from their colleagues and clients for their notice period and potentially further delaying their move to a competitor.
RegTech employers should carefully consider the inclusion of restraints in their employment agreements. These can provide valuable protection for a business, but in order to be enforced by a court must be reasonably drafted to protect legitimate business interests. Those business interests can include protection of confidential information and trade secrets and protection of goodwill, in the form of business connections with colleagues and clients.
Most restraints will seek to limit what an employee can do during and post employment, such as preventing them from working for a competing business during employment and for a specified period of time following termination and within a particular geographical area, or preventing solicitation of employees and clients for a set period of time. Although the predominant purpose of a restraint is to protect the business, some restraints have the effect of encouraging retention because they limit the employee's employment opportunities post employment.
The enforceability of any restraint will depend on whether the scope of the restraint is reasonable to protect the business' legitimate business interests in respect of that employee. If challenged, a lesser restraint period may be enforced by the courts, or none at all. Therefore, it is important to consider appropriate levels of restraint for each individual employee, depending on their duties and anticipated exposure to confidential information, trade secrets and valuable business connections. RegTech employers should also consider the extent to which they agree to their employees engaging in other pursuits, for example part-time employees working elsewhere, running their own companies or developing their own apps outside work time. They should ensure that any restraint is not so broad as to be inconsistent with other pursuits, if they are happy for their employees to continue with such activities.
RegTech businesses in growth phase may not have the cash flow to promise salary increases to employees who are threatening to leave. Employers in this position may want to consider offering alternative benefits such as share options, incentive plans and bonuses to attract or retain the best talent.
RegTech businesses should ensure they consider the above key factors and seek legal advice to ensure they have well-drafted employment contracts which they can rely upon to protect key elements of their business. Proactivity with regard to getting contracts right at the outset will pay off in the long run. Unfortunately, if you only address problems as they arise, the damage to the business will already have been done. An audit of current employment contracts can also help minimise a business' risk position and strengthen the position of RegTech employers when it comes to protecting their IP and confidentiality and keeping their key players.
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.