POST-TERMINATION RESTRICTIONS: PIVOTAL OR POINTLESS
Date Posted: Wed, 18 Nov, 2020
In this article, Rachel Hill, Head of Employment at Hadef & Partners addresses the five most frequently asked questions that employers raise when considering post-termination restrictions.
1. What is the legal position on restrictions?
Article 127 of the Labour Law provides that where an employee performs a role which allows them to become acquainted with confidential information, the employer may put in place an agreement or include in the employment contract a provision which prevents an employee from working with a competing business after termination.
Article 909 of the Civil Code further provides that any such agreement shall not be valid unless it is limited in time, place and type of work to the extent necessary to protect the lawful interests of the employer.
Accordingly, restrictions can be incorporated in contracts of employment as a way of seeking to limit an employee’s actions after the termination of the employment relationship. Clauses preventing defined activities after termination are generally referred to as post-termination restrictions (or simply “restrictions”) for the remainder of this article. The most common restrictions are “non-compete” clauses which prevent an employee from taking on a new role which places them in direct competition with the employer.
2. What should we do to protect our business?
In general, restrictions cannot be implied. In the absence of an agreement in writing (which may contain one or more restrictions), the employee will not be restrained after their employment. It is crucial that the contract of employment (or a separate contract) contains an express clause which sets out the nature and extent of any obligations or duties which are to apply both during employment and post-termination.
While restrictions are lawful, they must be “reasonable”. Reasonableness is determined in two stages:
Firstly, there must be a legitimate business or legal interest to protect. The most common legitimate business or legal interests which employers seek to protect are:
trade secrets / confidential information.
Secondly, the clause must extend no further than is reasonably necessary to protect that legitimate business or legal interest.
3. What does this mean in practice?
As stated above, restrictions must not go further than necessary to protect the employer. Therefore, clear and precise drafting is important in order to prevent a court from striking down the clause as void.
The first issue that a court will consider is whether the type of restraint is necessary to protect the legitimate business interest that the employer is seeking to protect. For example, if an employer seeks to protect its clients from being poached by the former employee, it may not be necessary to have a total non-compete restriction. It may be sufficient protection for the employee simply to be restrained from working with the clients of their former employer (i.e. a non-dealing restriction). There are, however, times when a non-compete clause will be the only way to achieve the desired effect.
How far can we push it?
An employer may wish to restrict the geographic area in which an employee is able to work. Generally, the wider the area is, the less likely a clause will be found to be reasonable and therefore enforceable by the courts. However, the context is always important. As well as trying to restrict the geographical area in which an employee is prevented from working, a clause may also restrict the specific type of work that can be done. This must also be narrowly defined.
Finally, a post-termination restriction must be reasonable in terms of time. The longer the period of time a clause covers, the more difficult it will be to justify that is not a restraint of trade.
4. What can we do if a former employee breaches a restriction?
Where an employer suspects that a former employee breached or will breach an express contractual restriction, the remedies available to the employer are not extensive.
In theory, the most suitable remedy is an injunction (i.e. an order from the court to restrain the former employee from acting in breach of the post-termination restraint). An injunction is a preventative measure as opposed to waiting for the former employee to cause loss and then issuing a claim for compensation.
However, with the exception of the DIFC and AGDM (which are outside of the scope of this article) injunctive relief is not provided for such matters in the UAE as the courts do not generally have power to grant and enforce injunctions. That only leaves the employer with the option of initiating a civil claim for damages.
When considering the merits of a claim for damages (i.e. compensation), the court will initially consider whether any post-termination restrictions are reasonable. The employer then faces the difficult burden of providing evidence to show that the employer has suffered actual financial loss as a direct result of the employee’s breach of the post-termination restrictions.
Damages claims can be extremely expensive to pursue and should not be initiated without careful evaluation of the likelihood of success. Further, unless there is very clear evidence to establish the full loss, it is likely that only a nominal award for costs will be made, if any.
5. Can we take action against the new employer in the event they are controlling our former employee?
The new employer may also become a party to proceedings if it has knowingly encouraged the employee to breach their contract or otherwise act unlawfully. Under Article 64 of Federal Law No. 18 of 1993 (Commercial Transactions Law), a business entity may not induce the employees or workers of a competitor so that they assist such entity in usurping the customers of the other business entity or such that they leave their employer’s service and enter into its service or disclose the secrets of the competitor. Article 64 of the Commercial Transactions Law also provides that the appropriate remedy for such acts will be compensation.
What else can we do to prevent former employees causing harm?
Although the employer’s remedies are not extensive and taking enforcement action is a costly process which may not yield the desired results, there are two other options that can be considered:
The first is the inclusion of a “garden leave” clause in the contract. This allows the employer to instruct the employee to serve out their notice period from a place other than the normal place of work and to impose conditions on the employee during such period (e.g. no contact with customers).
The second is the inclusion of a liquidated damages clause in the contract. This sets out a pre-estimate of the likely loss which would be suffered by the employer in the event of breach of a restriction. Where a liquidated damages clause exists, the burden shifts to the employee to prove that the amount claimed in the clause has not actually been suffered by the employer or amounts to a penalty clause (and is therefore unenforceable). The court also has the discretion to amend any amount specified to a level deemed to be reasonable, if formally requested by the employee.
Perhaps of even greater concern to the former employee, Article 379 of Federal Law No. 3 of 1987 Concerning the Penal Code (‘Penal Code’) provides that the employee may be sentenced to detention for a minimum period of one year and/or to a minimum fine of AED 20,000 if, by virtue of their profession, craft, position or art the employee is entrusted with a secret and then divulges that secret in cases other than those permitted by law or uses it for their own personal interest or the interest of another person unless authorised by the confiding person to disclose or use it. Employees may be deterred by the prospect of criminal proceedings. Criminal proceedings may also be brought against others conspiring in any crime and such actions are not uncommon in the UAE. Even if not successful, they are often time-consuming, distracting and stressful for the accused person.