How Your Business can Protect Confidential Information From Departing Employees

Dominic Russell

Employment relationships are just like any other relationship: the only certainty is that they will eventually come to an end.  

One unfortunate reality is that departing employees often pose the greatest risk to the future goodwill of a business, as they have had the opportunity to form relationships with the client base and supplier network.  Similarly, employees will often have had widespread access to commercially sensitive documents and information, and have received training on how best to exploit it, at least for the benefit of the company.  

One common way for businesses to try to protect their goodwill and prevent former employees from either poaching clients or setting up businesses in competition, is to include broad confidentiality terms and restraint of trade clauses in their contracts of employment.

Another unfortunate reality is that the most common obstacles faced by employers when seeking to enforce post-employment obligations are self-inflicted, usually coming as a result of a lack of evidence caused by poor planning and administrative oversights.  

Reasonably drafted confidentiality and restraint of trade terms can be extremely effective, however courts will be reluctant to make orders to enforce contractual restraints if the company cannot demonstrate that the contract was properly entered into, and that the employee, through their conduct in breach of the contract, poses a genuine risk to a legitimate interest of the company.  For more information on this, please see our Plain English Guide to Post-Employment Restraints of Trade & Protection of Confidential Information.

With that in mind, businesses need to plan for the inevitable employee break-up from day one of their time with the company, and there are a few simple steps that businesses can take to give their contracts the best chance of being enforceable if their staff do run off and try to take the business with them.

Risk Management: From Day One

Obtain professional legal advice with regard to the employment contract.  Restraint of trade terms can be particularly tricky to navigate, and will be closely scrutinised by a court.  Be careful of using templates, as restraint terms should be tailored to each employee.

Ensure that a signed copy of the employee's contract is scanned and saved to a dedicated location on the company's computer system.  A signed contract is the best evidence that an employer can have in proving to a court that an employee did agree to be bound to their post-employment obligations.  
Without a signed contract, it is possible that an application to enforce a restraint of trade term might be dismissed.

A couple of recent examples from my own experience illustrate just how easily this problem can occur, and similarly, how easily these issues could be avoided: 

1. The company issues the contract to the employee via email and the employee turns up to work without returning a signed copy.  The company do not have a follow-up procedure in place.

2. The company is attempting to enforce post-employment obligations against an employee who commenced with the company 10 years earlier.  When employee started with the company, the responsibility for storing employment contracts had been given to an individual administrative officer who is no longer employed by the company.  Now, nobody knows where the contracts were previously kept.

It is critical that employers have and maintain a comprehensive workplace surveillance policy.  

Workplace surveillance by a company is largely prohibited throughout NSW and ACT unless the company has a policy in place which explains:
 
1. the nature of any surveillance being carried out; and 

2. the purpose for which the surveillance may be used.  

In the context of enforcing post-employment obligations, evidence obtained by an employer through unlawful surveillance, i.e.  without a proper policy in place (such as evidence of emailing documents to themselves or secretly contacting customers) is likely to be inadmissible in court proceedings.  Carrying out unlawful workplace surveillance may also attract civil, or potentially criminal penalties.

Businesses should recognise that even if they are told not to, employees will use their personal devices for work, unless they are given an alternative.  
Allowing staff to use their own devices can save a company money, but does also create risk.  Providing staff with a company phone or laptop comes at a cost, but can have a number of potential benefits with regard to the protection of confidential information.

As an example, many people can and do access their company email account from their phone.  Senior employees, and technical or sales staff will regularly send and receive commercially sensitive information via email.  If staff are allowed to use their personal devices to access their company email accounts, company documents sent as attachments will find their way into personal cloud storage services such as Dropbox, Google Drive or iCloud.  Another problem is that staff will use their personal phones to communicate with clients.  Once an employee leaves the company, their contacts and text messages will go with them.

A company issued device on the other hand: 

1.    can be configured to control access to the company network and mail server;

2.    can be monitored remotely to identify suspicious activity; and

3.    belongs to the company and therefore the device, and the data stored on it belongs to the company and must be returned when the employee leaves.  

It is important to maintain strict IT security with proper controls, particularly over sensitive business information.  Similarly, your company should make sure to regularly back-up emails, document management and accounting systems, and use continual monitoring of email and data usage.

It is wise for businesses that utilise cloud storage services not to authorise staff to use their personal accounts, and instead, to consider setting up a corporate account and providing individual user access credentials for each staff member.  This way, when a staff member does leave, their access to the storage account can be removed by the company.  

Some cloud storage accounts do contain logs which can be useful in identifying download activity, as well as any devices and IP addresses that have connected to the account.  These logs often provide useful evidence of misappropriation of confidential information.

The Notice Period

Whether an employee resigns, or is terminated, the notice period can be a risky time for businesses.  

Departing employees tend to be looking forward to their next positions, thus their focus and priorities often shift from looking after their employer's interests, to taking care of their own.  The notice period is also the most likely time that an employee will attempt to steal company property and documents.  For that reason, businesses need to manage the transition process carefully in order to get the most out of departing employees, while also protecting themselves from risk.  

What are some simple steps that companies can take during the notice period?

Take some time to consider whether there is any actual benefit to the company in having the employee serve out their notice period in the office.  It may be safer for the business if the employee is directed to serve out their notice period from home, or even to simply offer them an early release.

Prepare a termination checklist for the employee that includes, amongst other things, the following steps.  Keep in mind that it is just as important to allocate a person to complete the checklist, in order to ensure that everything is ticked off sufficiently: 

Prepare a letter that clearly communicates to the employee: 

You may also include in the letter a short statement reminding the employee of their confidentiality obligations, as well as any contractual post-employment restraints (if applicable).
Above all, Coleman Greig strongly suggests seeking legal advice, especially in the case of employees who are leaving to go to a competitor.

Termination Day

Making a clean break and preserving data

Firstly, it is important to always conduct an exit interview with the departing employee, and in turn, to have the employee sign a declaration stating that they have returned all company property that was in their possession.  Be sure to make an official internal note of the interview in case there is ever a discrepancy in the future.  Either during, or immediately prior to this exit interview taking place, make sure to cut off the employee's access to any company IT services and/or accounts, and be equally careful to change all passwords used by the employee to access company services.

Save and preserve a complete copy of the employee's mailbox, making sure to include their calendar and any calendar notes.

If the employee has used a company issued computer and/or phone for work, consider sending the device to a forensic IT specialist to conduct a basic review of the device to check for abnormal activity.
Whilst this is not necessarily a crucial step in every case, no harm can come from taking a cautious approach to an employee's departure.

What should you do if you suspect that an employee has stolen company data, or is working in breach of a contractual restraint of trade term?

Try to secure any electronic devices that were previously used by the employee prior to them leaving by locking them in a secure place.  It is important not to attempt any sort of examination of the employee's devices without professional assistance.  

Collate relevant documents:

It is also important for companies to review all current and future business opportunities which the employee in question may seek to exploit, and to prepare a detailed rundown of any relevant information.

Seek urgent legal advice!  Any delay by a company may be viewed by a court as evidence that there is no genuine business risk to protect, and the court may in turn dismiss a case on that basis alone.  

Common pitfalls for employers

From experience, the most common obstacles faced by employers when seeking to enforce post-employment obligations are self-inflicted.  These are:

To quote Nigel Carson from KordaMentha Forensic, "every computer contact leaves a digital trace".  It truly is important to take heed of the fact that in an environment where the best evidence usually wins, conducting inexpert investigations can be a self-defeating exercise.

Of course, all of these pitfalls are easily avoidable with a little bit of advance planning, disciplined business management and legal advice.

Finally, we all recognise that in 2018 filing cabinets and ledgers are pretty much a thing of the past.  Similarly, I suggest that it is also time to acknowledge the fact that the "IT guy" and the "mate of the boss who's a bit of a tech-head" have likewise become redundant.  Virtually all business activity is conducted electronically through computer systems, so regardless of how small a company may be, the IT system is often the most important piece of commercial infrastructure that they have. 

A professionally managed IT system using up to date hardware is not just good for business, it will also save you certain grief in the future if you need to rely on it to recover data or gather evidence for use in legal proceedings.  

How can Coleman Greig help your business to protect its confidential information?

Coleman Greig's employment team can assist businesses at every stage of the employment life-cycle.  Our lawyers are able to provide expert advice on the preparation and implementation of internal policies and procedures, drafting contracts and agreements, risk identification and management, and enforcement of post-employment obligations including litigation to prevent misuse of confidential information, and to enforce contractual restraints of trade.

Please bear in mind that whilst Coleman Greig's Employment Law team can provide legal advice on risk management and the protection of confidential information, we don't manage IT systems.  I would urge any business with an IT system currently serviced by the "IT guy" to seek professional advice from a reputable company!

If you have a query regarding any of the information found in this article on protecting confidential information, please don't hesitate to get in touch with: