Protection of confidential information for employers
Departing employees can pose a risk to the future goodwill of a business, as they have had the opportunity to form relationships with its customers and suppliers.
Employees will often be given unfettered access to commercially sensitive documents and information, and will have received training and have experience in terms of how best to exploit them.
The loss of customers to departing employees is an all too common situation faced by employers. A customer's choice to follow an employee can be completely unilateral, but more frequently it is the result of the former employee enticing the customer away.
Employers should therefore take steps to protect their confidential information and, by extension, their customers, suppliers and goodwill from former employees.
How can employers protect their confidential information?
Restrictions on employees' use of information obtained during the course of their employment stem from a number of sources, including:
- express and implied obligations owed as part of their contract of employment;
- fiduciary duties to act in their employer's best interests and not to misuse their employer's confidential information;
- confidentiality obligations owed under sections 182 and 183 of the Corporations Act; and
- the equitable duty of confidence.
The advantage of expressly providing for confidentiality obligations in an employment contract is that it allows an employer to clearly set out the rights claimed. Employees who might otherwise be unsure as to what constitutes confidential information are made aware of their obligations from the outset.
Confidential information can also be defined in the contract to include customer and supplier lists, contact details and technical information that might otherwise be considered "know-how" that a former employee would be free to exploit.
What constitutes a trade secret rather than know-how?
Former employees are free to use certain confidential information obtained during their employment, unless the information in question is a "trade secret", rather than "know-how" developed by the employee during the course of their employment.
A trade secret is secret information that is confidential to the employer. The simplest way to think about trade secrets is as information which, if disclosed to a competitor, would be liable to cause real (or significant) harm to the business. This could include customer lists, pricing information and profit margins.
An employee cannot use such information during the course of their employment for purposes other than those that enhance the interests of their employer. However, after an employee has left their employment, the law will also act to prevent the employee using such information, whether or not there is a contractual agreement between the former employee and the former employer restricting such use.
"Know-how" is information that is confidential, but which once learned necessarily remains in the employee's head and becomes part of his or her own skill and knowledge, to be applied in the operation of the employer's business.
What can a business do to protect its confidential information?
The best way to prevent a former employee from misusing confidential information is to take practical steps within the business in order to prevent employees from accessing or taking such information with them when they leave.
If a particular document is confidential, it should be marked as such. Confidential information should only be shared as appropriate, with disclosure limited to those who need to know.
It is also important to put in place systems to restrict access to confidential information (such as by using password protection or user access controls for electronic data) and to monitor access and use.
Employers should have standard procedures in place for dealing with departing employees. Among other things, those procedures need to deal with the issue of confidential information.
If you have any concerns, seek legal advice and issue a letter that clearly communicates to the employee:
- Their ongoing confidentiality obligations, as well as any contractual post-employment restraints (if applicable);
- A list of company property that is to be returned, including a reminder that property includes documents and information; and
- When and where they are required to return all company property.
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.
