Ruling sheds new light on post-employment restrictions
It is common, particularly within service industries and at the executive level, for Hong Kong employers to insist on their employees agreeing to “post-employment restraints” (PERs). These are restrictions contained in an employment contract which seek to prevent employees from doing certain things, such as working for a competitor, for a certain period of time after the cessation of their employment.
PERs are notoriously controversial. Employers are almost always often keen to have PERs included in an employment contract because of their potential to protect the business from the damage an exiting key employee can cause. On the other hand, employees are resistant to PERs because of the restrictions they place on what the employee can do for work in the future.
The starting position in Hong Kong is that all PERs are unenforceable because they restrict the right of a person to carry on their trade or profession freely. However, a recent High Court case has shed some light on the circumstances in which Hong Kong courts might be inclined to enforce a PER.
Kenneth Lo joined Pure International (HK) as a fitness instructor in 2004. During his employment, he became one of Pure’s key fitness instructors. He had an employment contract with Pure which contained a PER clause prohibiting him from working as a fitness instructor within 1,000 metres of Pure’s principal location for a period of six months following the end of his employment.
Lo resigned from Pure and joined nearby Ultimate Performance as a fitness instructor. Pure subsequently applied for an order to enforce Lo’s PER. The court decided in favour of Pure and enforced the PER.
Several facts were relevant to the court’s decision. First, the PER was clear, precise and reasonable in terms of its period of operation and geographical scope. Second, Lo was aware of the PER, had signed the employment contract which contained the restraint, and had acknowledged the restraint before he left Pure’s employment. Third, Pure had commercial interests and goodwill which needed a reasonable degree of protection. Fourth, the 1,000 metre geographical scope still left Lo with many a number of employment options.
Hong Kong has no legislation specifically governing the enforceability of PERs. However, the case law is unanimous that, in order to be enforceable, care must be taken in the preparation of PERs to ensure that they are should be tailored to deal with the particular circumstances of each employment situation.
The general rule is that a PER will only be enforceable if it does no more than is reasonably necessary to protect the legitimate proprietary interests of the employer. In particular, the employer must have legitimate proprietary interests which need protection from damage which the employee is capable of causing. The duration, geographical area and scope of the restraint must then be directly related to the protection of those interests. In this regard, the employer should consider the minimum period it will require to re-build loyalty and recover from the loss of the employee, and the geographical area in which its proprietary interests reasonably require protection.
The employee’s seniority, access to confidential information and the degree of influence they have over the business will also be relevant factors in judging the reasonableness of the PER.
Where the PER operates to prevent the employee from enticing other employees away from the employer, the restraint clause should be limited to a target group of employees. Specifying those employed while the employee was employed, and with whom they had a personal connection or over whom they could exercise some influence, is likely to be of assistance. A blanket restriction restraining the employee from enticing away any and all employees of the employer is not likely to be enforceable.
Similar principles apply in relation to the non-solicitation of clients. A blanket ban on approaching all clients, including those with whom the employee had no contact or connection, will not be enforceable. The clause should be drafted to apply only to clients with whom the employee had a personal connection and those who are most likely to follow the employee on their departure.
If both the employer and the employee turn their minds to these issues when agreeing the terms of the employment contract, both parties can be satisfied that any PERs included in the contract are fair and reasonable. This, in turn, may make the clause more palatable to the employee, and make the clause better able to protect the employer.
Herbert Smith Freehills has 2,800 lawyers and 460 partners in over 20 offices globally. It advises on dispute resolution and employment, among other areas. Gareth Thomas is head of the Hong Kong commercial litigation team and responsible for the Greater China employment practice. Helen Beech is a senior member of the Hong Kong employment practice and has a wide range of experience in employment matters.
The information contained in this article should not be relied on as legal advice and should not be regarded as a substitute for detailed advice in individual cases. If advice concerning individual problems or other expert assistance is required, the service of a competent professional adviser should be sought.