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Employee competition: top tips for start-up businesses

21 May 2021

In this article, we set out our key recommendations for protecting your start-up business against employee competition, from managing the risks arising when you recruit new employees to putting in place the right contracts and responding to competitive threats.

Protecting your business from employee competition is vital, as you can stand to lose a lot without the right safeguards in place.  We’ve set out some of our top tips below.

Avoid competition risks on recruitment

You want your start-up business to succeed and so of course you want to hire the best people. Maybe they’ve been involved in similar businesses before, or they are bringing useful skills with them from their previous employment.  There can be legal risks for your business, however, if your latest recruit ends up breaching their responsibilities to their previous employer. 

To avoid employee competition risks when recruiting, here are some things you should watch out for:

  • Make sure you understand what express or implied restrictions the would-be recruit is subject to. You should request a copy of their current restrictions, whether those are in their employment contract or another document.
  • You may want to get a warranty from employees that they are not in breach of any restrictions.
  • Individuals may have a “disclosure of offer” clause in their employment contract which means that they could have an obligation to disclose your job offer to their current employer. 
  • You should never request that candidates provide you with confidential information, either during the recruitment process or when they become an employee. Our top tip is to put a statement in your standard offer letters making clear that you aren’t interested in this information. 
  • If employees do provide you with information and you’re suspicious about its origin or confidentiality, you should investigate.
  • Beware of the complexities that come with “team moves”. This is when two or more individuals leave a business at the same time or in quick succession. You should ensure that all recruitment is done entirely separately and independently. 

Put effective employment contracts in place

When you’re excited about launching your start-up, getting employment contracts in place probably isn’t your top priority! We understand that you often need to move quickly when taking staff on, however it is critical to put effective protections in place from the outset of the employment relationship.

We cover below the importance of restrictive covenants, garden leave and the protection of confidential information and intellectual property when it comes to protecting your business from potential competitive threats. These issues should be addressed in your employment contracts. As basic as it might sound, you should also make sure that contracts are actually signed and returned to you (this is easily forgotten!).

Invest in building a suite of policies

Similarly, having a suite of employee policies in place can help to protect your business. For example, from an employee competition perspective, you should consider having the following:

  • Code of Conduct – to set standards of acceptable behaviour for employees;
  • Communications & IT policy – rules on the use of communications systems at work and how you monitor use of those systems; and
  • Social media policy – to cover what is appropriate use of social media at work and personally.

If you’re considering allowing employees to use their own equipment for work purposes (e.g. their personal mobile phone and laptop), then you should have a specific policy for this too. 

You really need a confidential information clause

It is very important to include a well-drafted clause in the employment contract for protection of confidential information, both during employment and after the employment relationship ends. You will get very little protection automatically from the law and undoubtedly your start-up will have lots of confidential information it needs to protect – think, for example, lists and details of clients and prospects, terms of business, pricing strategies, marketing plans and forecasts. A confidentiality clause will set out clearly the types of information that are protected and will restrict what employees can do with it.  Adding this clause to your template employment contract will deter employees from seeking to steal or misuse confidential information, and will give you a legal basis to take action should any employee try to do so.

Clarify the position with intellectual property

Generally, in the UK, an employer will automatically own any intellectual property rights arising over works created by its employees in the course of their employment. There are however exceptions to this rule and each case turns on its facts. It is helpful, therefore, to include express wording about IP rights in the contract of employment so employees know where they stand.

If IP ownership is a crucial part of your start-up, you should seek specialist legal advice to understand fully how IP rights arise and should be protected (see details of our IP360 service here).

Consider restrictive covenants

Restrictive covenants, or post-termination restraints, are designed to protect the employer against competitive activities by former employees for a specified length of time after they leave your business. These provisions are aimed at what happens after the employee leaves and are in addition to any restrictions you have in place during the employment relationship (for example restricting employees from having second jobs or side-hustles if these conflict with the activities of the start-up). There are various types of restrictions with different aims. For example: a non-dealing clause intends to stop a former employee doing business with your customers, clients, prospects or partners, whereas a non-poaching clause intends to stop them from employing or enticing other colleagues away.

Any post-termination restraint that goes further than reasonably necessary to protect a legitimate business interest will be void as a restraint of trade and unenforceable. What is reasonable depends on your business and the employee’s specific duties and responsibilities.  If you go too far in your attempts to restrain the employee, you can end up with no protection at all. Our top tip, therefore, is to spend some time tailoring the drafting of these clauses to the specific role of the employee in question to give the best possible protection from post-employment competition by former employees.

Look into garden leave

In some situations, where an employee is serving their notice period, you may want them to stay away from work to minimise any potential damage. This enforced period away from work is called “garden leave”. There is no automatic right to place an individual on garden leave so it is advisable to include an express provision in your employment contracts that gives you the discretion to do this.

Be aware, though, that most well-drafted post-termination restraints will have a garden leave off-set which will reduce the duration of any restrictions by the same period of time that an employee has spent on garden leave before their employment ends.  So, before deciding to exercise a garden leave clause, you should consider the pros and cons first.

Act quickly in response to any threats

If an employee breaches – or threatens to breach – their duties or restrictive covenants, it is paramount to act quickly to minimise the potential damage to your business and to avoid any argument that you have delayed.

It is possible to apply to the court for an injunction which is an order either restraining the employee from doing certain acts or requiring them to do certain acts.  However, you will need to act quickly if you are going to persuade the court to grant an injunction.  The success of your application is likely to turn on the evidence, so you will also need to take swift action to investigate and preserve evidence of wrongdoing.

For more information about steps you can take to protect your start-up from employee competition see our Inbrief guide to Protecting your business

 

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