Pitfalls of Departing Employees
by Mark A. Shank
Departing employees present special problems, as seen from three typical points of view: former employer, new employer and departing/new employee. Interests of new employers and their new employees are often, but not always, aligned. Typically, claims involve noncompetition agreements, duty of loyalty, confidentiality agreements, trade secrets and preservation of electronic information.
The Texas law governing noncompetition covenants has changed dramatically and is now governed by Texas Business & Commerce Code, Chapter 15(E). Courts typically require adherence to Chapter 15(E) to enforce noncompetition agreements.
Recent cases changed the focus in most cases from enforceability to breadth and scope. Almost invariably, the controlling issue is whether an employer seeks to protect a business interest that justifies a covenant’s scope. Typically, noncompetition covenants come in two flavors: (1) noncompetition agreements prohibiting competition in a particular geography and for a certain time, and (2) nonsolicitation covenants focusing on clients and prospects.
When hiring employees that previously signed a noncompetition covenant, new employers undertake responsibility and risk. Texas law allows a cause of action for interference with valid noncompetition covenants. To avoid risk, new employers should take steps to determine whether new employees can honor a former employer’s covenants and prevent new employees from competing with former employers. In any event, prudent employers discuss parameters with new employees and procure a written understanding regarding boundaries.
Employees should consider—when signing covenants and when departing—the importance of their mobility and a covenant’s time or geographical restrictions. Again, post-signing, employees need to determine what risk they are willing to take if a proposed business activity breaches a covenant.
Confidentiality/Non-Disclosure Agreements (NDA)
Most employers require employees to sign NDAs that define, label and protect trade secrets and confidential information. If no NDA exists, then an employer’s information is still protected to the extent it constitutes trade secrets. Typically, NDAs broaden protected information’s scope and evidences an employer’s attempt to protect this information.
NDAs should provide a reasonably precise “confidential information” definition. In 2013, a National Labor Relations Board’s administrative law judge held that two covenants (confidentiality and non-disparagement) violated non-unionized employees’ rights under the National Labor Relations Act. Also, employers should take reasonable steps to preserve confidential information, in hard copy and electronic medium.
Employers should make certain that there is neither intentional nor inadvertent disclosure of an employee’s former employer’s confidential information. And employers should obtain certification (1) from new employees that they have not and will not cause confidential information to migrate from former employers to a new employer and (2) from new employees’ former employers that all confidential information was returned.
Typically, prudent employees view minimizing risk of controversy as their best bet. Thus, departing employees should consider what access to trade secrets or confidential information they received and how to return any confidential information.
Duty of Loyalty
Texas maintains a vibrant duty of loyalty cause of action. Employers should reinforce this duty through contract and be vigilant by reinforcing this duty. Contracts that reinforce this duty include requirements that employees avoid conflicts of interest, remain loyal to the employer, and will not knowingly compete or engage in conduct harmful to their employer’s business interests. The greater an employee’s responsibility, the greater his duty of loyalty.
New employers should ensure that they do not entice new employees to breach duties of loyalty—and employees must consider their duties and responsibilities to former employers.
Texas recently passed the Uniform Trade Secrets Act, which is effective September 1, 2013. Generally, trade secrets are property known in the industry, commercially valuable and maintained as confidential. Trade secrets are also protected by common law. Employees and their new employers should ensure that trade secrets are not taken from former employers.
Preservation of Electronic Information
Once litigation or the threat of litigation occurs, the preservation duty attaches. A careful approach should be used with regard to social media content. A New Jersey court recently ordered spoliation sanctions (adverse inference) against a litigant whose Facebook account was deleted during litigation.
Departing employees raise many issues. Hopefully, this article provides at least a checklist for dealing with them.
Mark A. Shank, of Gruber Hurst Johansen Hail Shank, is writing a book for Texas Lawyer Publishing entitled “Departing Employees,” which will be available at the end of this year. He thanks Greg McAllister for his assistance writing this article. He can be reached at firstname.lastname@example.org.