Restrictive covenants with the sole aim of preventing competition will not be upheld by Hong Kong courts. In cases where there is a legitimate interest to be protected, restrictive covenants must be reasonable and not go beyond what is necessary to protect such interest.
GENERAL PRINCIPLES
Contractual terms restricting an employee’s activities after the cessation of employment are void for being in restraint of trade and contrary to public policy, unless the employer can show that they are reasonable, in all circumstances, to protect a legitimate business interest.
LEGITIMATE INTERESTS
In broad terms, the legitimate interests which courts have considered capable of being protected fall into the following categories:
- trade connections and goodwill
- trade secrets and other confidential information
- stability of the workforce.
An employer must be careful to distinguish the protection of these legitimate interests from an employee’s personal skills and qualities which cannot be protected. The employer must also identify what constitutes a trade secret or confidential information. While some aspects, like a secret manufacturing process, are more easily categorised as trade secrets, other types of information—such as price lists or supplier and customer details—are more debatable.
REASONABLE AND NECESSARY
Once a legitimate interest has been established, the employer should only impose post-termination restrictions which are reasonably necessary to protect that interest. Therefore, a restriction must be limited to ensure that, not only are the relevant activities restricted to what is reasonably necessary to protect the legitimate interests, but also that the duration, geographical extent, and scope of the restriction are reasonably necessary.
In order to protect a legitimate interest, an employer can consider imposing non-competition, non-dealing, and non-solicitation clauses.
NON-COMPETITION
A non-competition restriction is generally the more difficult type of covenant to enforce. This is because they can prevent an employee from working in their field for a certain time after leaving a job, which could significantly impact their livelihood. However, a non-competition restriction may be enforced—particularly for a senior executive of a company who may have highly confidential information, such that the only effective protection is to ensure that they are not engaged in a competing business in any way.
NON-SOLICITATION OF CUSTOMERS
The same issues set out above apply. A post-termination restriction should be restricted by reference to customers/suppliers with or over whom the employee has had dealings during a specified period before the date of termination, confidential information and influence. A reasonable time limit to this restriction may be the amount of time that it is likely to take for the influence of the departing employee to be replaced by the influence of that employee’s successor.
NON-SOLICITATION OF EXISTING EMPLOYEES
If the covenant is sufficiently tightly worded, then certain employees can be protected. Courts have held that an employer has a legitimate interest in maintaining a stable workforce in a highly competitive business. Any clause which seeks to prohibit the solicitation of employees will need to account for how long the departing employee will have influence over existing employees, as well as the scope of the class of employees over whom the influence will exist. In practice, it is often difficult to prove that an employee has been solicited by the ex-employee.
ON THE HORIZON
The legal principles on restrictive covenants are well established in Hong Kong. Whether they are enforceable would ultimately turn on the facts and circumstances of each case.
Back to A Guide to Restrictive Covenants
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