Enforcing Post-termination Restrictions in Employment Contracts
Employers may consider utilising post-termination restrictions (‘PTR’) in employment contracts to safeguard their business. Specifically, PTR is a common legal tool to prevent senior employees from damaging the interests of the company, actions include working for competitors, soliciting clients or suppliers, and poaching employees after departing the company. Employees under a PTR clause can be limited from joining competitors or activities within a specified period and geographical radius.
In Hong Kong Special Administrative Region (HK SAR), the court shall enforce a PTR-based employer’s justification of its (PTR) reasonable circumstances to protect a legitimate business interest. Therefore, PTR is highly sensitive to the individual’s current position and responsibilities within the company. Precedents can indicate whether the PTR is enforceable, however shall not be viewed as determinative. Generally, the courts will consider the following principles when enforcing a PTR.
Legitimate business interest
The employer shall demonstrate that the PTR is utilised to protect a legitimate business interest. Examples include protecting client and supplier relationships, confidential information or trade secrets, and maintaining a stable workforce. The courts are likely to determine whether the employer is entitled to protect such business interest concerning its business activities and whether the departed employee could exploit such information for their own interests.
Although, the employee’s skills and knowledge acquired from the duration of the employment shall be separately distinguished from the above company assets.
The PTR shall not establish restrictions beyond what is reasonably necessary to protect its business interest. ‘Reasonably necessary’ is specific to the individual’s circumstances and the courts consider the following factors to define what is reasonably necessary:
Scope of activities restricted
Restricted activities must be related to the employee’s activities during their employment in the company. We suggest that the PTR is updated accordingly to the employee’s most current responsibilities and role in the company. Since employees may have entered the company as a junior and depart as senior management, outdated PTR may not include the most current responsibilities and roles, therefore the court may not uphold the PTR.
Duration of restrictions
Activities shall be restricted for a reasonable duration. Usually, the duration is based on the validity of the business interest. For example, if the employee is restricted from soliciting existing clients, the duration could be based on the period required for a new employee to establish rapport with existing clients. Nonetheless, we find that durations beyond one year are unlikely to be enforceable.
Geographic scope of restrictions
The geographic scope shall acutely reflect the employer’s geographical business area and its relation to competitors’ presence. Employers should be specific in identifying the geographical area of their business activities and competitors. For example, an employee could be restricted from being employed in the activity same as the one carried out by the former employer within a certain radius, so that the existing customers of the employer do not change to the employee’s new company.
For employees, it is important to note that the court may uphold parts of the PTR clause, whilst other parts can be deemed as unreasonable. This ‘blue pencil test’ permits employers to enforce reasonable restrictions and cross out the unreasonable restrictions without further modifications.
In conclusion, enforcing a PTR can be challenging and the courts may not uphold all of the PTR clauses. Primary, the PTR should be carefully drafted and tailored to the employee’s current role and responsibilities. Equally, the employers are required to demonstrate the case to protect a reasonable and legitimate business interest, otherwise, the PTR could be invalid. We suggest that companies should seek legal advice and review whether PTR clauses are necessary for personnel before a PTR clause is utilised.
If you are looking to discuss more about employment law in Hong Kong SAR , please contact Horizons at email@example.com, and our Partner in charge will be in touch.