Issues to consider when employees quit en masse

By Duncan Abate and Hong Tran, Employment and Employee Benefits Group, Johnson Stokes & Master

Article exclusively contributed by Johnson Stokes & Master

On 22 March 2005, 33 inter-dealer brokers employed by Company A terminated their employment with immediate effect by tendering payment of wages in lieu of notice. On the same day Company B's solicitors wrote to Company A advising them that "several" of the employees who had resigned would be "taking up employment with [Company B] when legally permitted to do so".

The employment contracts for the majority of the brokers contained post-termination restrictive covenants (PTRs). These included restraints against the brokers soliciting other employees of Company A, soliciting and dealing with Company A's clients, and engaging in a business in competition with Company A (the Non-competition PTRs).

Most of the Non-competition PTRs required Company A to pay the brokers their monthly salary for the period of restraint (which was three months in all cases). This was a precondition to the enforceability of those PTRs. In the circumstances, Company A released the brokers from their Non-competition PTRs, but still insisted on compliance with the other PTRs which did not require payment of salary.

On 1 April 2005, a further five back-office staff employed by Company A terminated their contracts by tendering payment of wages in lieu of notice.

Company A applied as a matter of urgency to the Court of First Instance. They sought, among other things, injunctions restraining Company B from (a) inducing remaining employees of Company A from breaching their contracts of employment, (b) inducing former employees of Company A from breaching PTR obligations, and (c) making use of information provided by former employees of Company A in breach of their obligations.

The judge first considered whether Company A was entitled to "springboard relief". The essence of this is an injunction to prevent a person who has obtained confidential information from using it as a springboard for activities detrimental to the party who originally provided it. Historically, the granting of springboard relief was confined to cases of misuse of confidential information.

In the present case, Company A had not alleged that Company B or any of the relevant employees had misused confidential information. However, Company A did argue that the springboard principle should be extended to situations which did not involve confidential information, but where Company B could have obtained an unfair advantage from some other breach by the former employees.

After considering the development of the principle, the Court concluded it was limited to cases of misuse of confidential information and did not apply to Company A's circumstances.

The Court also stated the well established legal position that PTRs are unenforceable unless they are reasonable in all the circumstances. They did not go into the detailed wording, but said that the PTRs were too wide in application and therefore unenforceable. The Court added that the PTRs could not even be saved by the deletion of certain words from the clauses.

Finally, they considered whether mutual consent was required to terminate an employment contract by payment of wages in lieu of notice under section 7(1) of the Employment Ordinance (EO).

In short, this section provides that either party to an employment contract may terminate it without notice by "agreeing to pay" to the other party a sum equal to the amount of wages which would have accrued to the employee during his notice period.

Company A argued that the words "agreeing to pay" required mutual agreement for any termination by payment in lieu of notice to be effective. Their view relied on a 1974 majority decision of the Full Court. Therefore, they argued that in respect of the five back-office staff, their employment had not been terminated since Company A had not agreed to accept payment of wages in lieu of notice.

The staff concerned argued that mutual consent was not required, relying on a 2004 interlocutory appellate court decision.

In the current case, the Court noted the 1974 decision, but found that mutual consent was not required. Therefore, the back-office staff had validly terminated their contracts.

In the end, Company A lost on all three grounds and no injunction was ordered.

Q & A on post-termination restrictive covenants
Q1 Can you provide an example where the "springboard principle" may apply?
A1 The principle may apply if an employee takes trade secrets, which are proprietary to his employer, and uses them to set up a competing business.

Q2 How do the courts determine whether a PTR is reasonable?
A2 Generally, the courts look at the nature of the activities the employee is restrained from engaging in, the period of the restraint and the geographical scope of the restraint.

Q3 How can a PTR be enforced if a former employee is found to be in breach?
A3 The employer can apply to the court for an urgent injunction to restrain the employee from breaching the PTR. The employer can also claim damages for any loss suffered.

Taken from Career Times 17 June 2005

(Last review date: 23 August 2013)

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