Restrictive Covenants Under Hong Kong Employment Law

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.