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Restrictive covenants under Hong Kong employment law – Employee Rights/ Labour Relations



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Post-employment restrictive covenants such as a non-compete
clause or a non-solicitation clause are often included in
employment agreements to protect an employer from an employee who
might go on to undermine the employer’s business after he
ceases his employment. Like many other jurisdictions, these types
of restrictive covenants may be unenforceable or may be construed
narrowly depending on the specific language used and based on the
individual circumstances of a given employer or employee. If you
would like to understand your post-employment obligations as an
employee under Hong Kong employment law or if you would like to
understand how well restrictive covenants in your employment
agreements are protecting your business interests as an employer,
please contact
one of our
employment
lawyers.

Post-employment restrictive covenants such as non-compete
clauses and non-solicitation clauses seek to limit the types of
activities in which a former employee may engage following the end
of his employment. They are commonly included in employment
agreements and are intended as restraints on trade to protect the
former employer from an employee who might, for example, join or
setup as a competitor to the employer, poach the employer’s
clients or suppliers or hire away members of the employer’s
workforce.

Hong Kong courts recognize that an employer has a legitimate
business interest in its trade secrets, workforce, supply chain and
client base but are wary that limitations imposed on an employee
may prevent the employee from seeking a livelihood commensurate
with his skill set, knowledge and background. As a result, when
called upon to decide upon the effect of a restrictive covenant,
the courts may hold the clause enforceable or may construe the
clause narrowly.

For employers, a court’s decision to strike down a
restrictive covenant or to give it a narrow effect may disappoint
an employer, who might be left with no protection of its business
interests or a level of protection which the employer regards as
inadequate. Conversely, for an employee, a court’s decision to
uphold a restrictive covenant may frustrate an opportunity which an
employee has chosen to pursue or limit career options and
plans.

Application of Restrictive Covenants

At the outset, as a general principle, following termination of
an employment relationship, no restrictive covenants are implied.
This is not to say that employees owe no duties following the end
of their employment. They do. For example, they may owe an implied
duty neither to use nor disclose the employer’s confidential
information. Nevertheless, an employer who wishes to limit the
activities of his former employees in a way that may be regarded as
a restraint of trade must expressly include covenants to give
express effect to these limitations, whether in the employment
agreement, settlement agreement to end the employment relationship
or other agreement binding the employee.

Common post-employment restrictive covenants include non-compete
clauses, which may restrict the employee from joining a competitor
for a specified period of time, as well as non-solicitation
clauses, which may restrict the employee from soliciting work
colleagues, clients and prospective clients of the employer and
suppliers of the employer. However, the range of restrictions is
unlimited. Employers must in each case consider what protections
they may need to protect their own interests and include those
protections expressly in the employment documentation signed with
the employee.

Reasonableness of Restrictive Covenants

Though it is common for employers to incorporate
“standard” restrictive covenants into employment
agreements, the courts approach such clauses with specific
individual circumstances in mind. A one size fits all approach to
such clauses creates real risk that a court may hold such clauses
to be unenforceable or that a court may construe such clauses
narrowly on the basis that individual circumstances do not justify
the breadth of protection sought by such clauses.

Courts will consider the reasonableness of post-employment
restrictive covenants. The requirement of
“reasonableness” means that each restraint must restrict
an employee no more than reasonably necessary to protect the
legitimate business interest of the employer. In this regard, the
prevention of competition alone is not a legitimate business
interest. However, legitimate business interests may include:

  • trade secrets;

  • confidential information;

  • trade connections;

  • a stable and trained workforce; and

  • goodwill.

What is reasonable is fact-specific and usually the relevant
time for determination of reasonableness is when the
post-employment restrictive covenant was made.

Nature of Employer’s Business

A court will have regard to the nature of the employer’s
business as well as to the industry in which the business operates.
For example, a longer period of restraint may be less likely to be
reasonable in technologically advanced and fast paced
industries.

Nature of Employee Job Duties

A court will have regard to the extent to which the employee is
in a position to damage the employer’s business interests. For
example, aggressive restraints against soliciting clients are more
likely to be reasonable where an employee will have access to
highly confidential client information or will have frequent
contact with clients.

Seniority of Employee

The more junior the employee is, the more difficult it is to
justify the reasonableness of restraint.

Relationships of Employee

In cases of non-solicitation restraints, the court is more
likely to enforce a clause where the employee is restricted from
soliciting a person with whom the employee had contact or personal
influence over within a certain period of time preceding the
termination of employment.

In the case of a restrictive covenant in the form of a
non-solicitation of clients, the court will consider the time
needed for the outgoing employee to break connections with the
clients and for another employee to have a reasonable opportunity
to demonstrate his effectiveness to customers to re-establish
relationships following the departure of the outgoing employee.

In the case of a restrictive covenant in the form of a
non-solicitation of employees, the court may consider such a
restraint to be more reasonable if non-solicitation is limited to
employees who are difficult to replace rather than if
non-solicitation applies to all employees of whatever job nature.
In other words, the more specialised an individual, the more likely
it is that a court will enforce a clause preventing an outgoing
employee from poaching that individual.

Garden Leave

Where an employee is put on garden leave and has no actual
involvement in the business, the court may take that period into
account in calculating the total period of restraint for the
purpose of determining the reasonableness of that period.

Compensated Restraint

The court may be more inclined to consider a restraint to be
reasonable if the employee is adequately compensated for the
restraint. So, for example, if the employee will receive their full
salary whilst complying with the restraint, the restraint will more
likely be enforceable even though the employee is unable to use his
skills and knowledge to work.

Termination of Employment

Where an employer breaches the employment contract, it is
possible that the post-employment restrictive covenants do not
survive the termination of employment.

Certainty

Under Hong Kong employment law, a restrictive covenant must be
sufficiently clear and unambiguous. An uncertain or ambiguous term
will be construed against the employer.

For instance, a court may have difficulty construing a clause
prohibiting solicitation of “senior employees” if there
is no definition of a “senior employee”. In these
circumstances, it may construe the term differently than the
employer expected.

Court Approach Where Restraint Unenforceable

Generally, the court will not rewrite a post-employment
restrictive covenant to turn an unenforceable restraint into one
that is enforceable. Thus, for example, a court will not reduce the
period of restriction stated to be 12 months down to 6 months. The
court may however, delete specific language which it considers to
be unreasonable from a restrictive covenant so that the restraint
becomes reasonable. So, for example, where a restraint provides for
a restriction on “Hong Kong, Singapore and Malaysia”, the
court may opt to strike down the restriction in Singapore but keep
the restrictions in Hong Kong and Malaysia.

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.



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