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Preparing to compete against employer-what is permitted?

27th July 2012

A couple of recent cases in the appeal courts have examined and considered the law relating to steps being taken by an employee to compete against the employer.

Employers spend a great deal of time and effort training staff, placing reliance on them, entrusting them with  their trade secrets and confidential information.

Over the years the courts have developed case law which has established that employers can protect their legitimate business interests against former employees in certain circumstances. This protection can extend to cover trade secrets and confidential information. However, the courts have looked on restrictions against working as a competitor or for a competitor after leaving the current employer with greater caution.

The courts have regarded as fair dismissals of employees that have been found to be actually competing against their current employer. However, employers will often want to take action against an employee as soon as there is an indication that the employee is planning or preparing to work as or for a competitor. Recent cases in the appeal courts indicate that employers need to act carefully before dismissing an employee that is found to be taking steps to work in competition against them.

In the case of Khan v Ladsker Child Care Ltd the Employment Appeal Tribunal  examined the case of an employees that had taken steps to compete against their employer. The employees in question had put together a detailed business plan, including making use of the expertise they had obtained in their current employment. Mr Khan was a manager of one of the care homes operated by his employer. He and his colleague were dismissed for having planned to set up in business against their employer, using company resources to do so, and breaching trust and confidence. A colleague had opened Mr Khan's work e-mails, and noticed an attachment referring to a business plan. It was clear the document was a pitch for business. The facts and figures used in the plan seemed broadly similar to the figures of costings that were appropriate to the employer's own business. In dismissing them the employer concluded that they had used company information including costings, and used company resources to help take the steps to compete. The employer regarded the employees as being guilty of gross misconduct and dismissed them. 

It was accepted by the Employment Appeal Tribunal that the employer had a genuine belief that the employees were guilty of gross misconduct. However, there was a separate question of whether the actions of the employees actually amounted to gross misconduct, and whether or not the assertions that they had used the company's resources was actually supported by evidence. The original Employment Tribunal that heard the case had failed to engage with the question whether the kind of information that they had used could, as a matter of law, be regarded as confidential to their employer. Existing case law shows that to be confident of dismissing for this type of situation the employer needs to be able to show that the employee has been making lists of their employer's customers, or memorising such lists for use after their empployment had ceased. Similar principles would apply to copying an employee-specific piece of information which is crucial and confidential to their business. It is not in itself gross misconduct to make preparations for a future business  to be conducted after leaving the existing employer. The use of the sort of knowledge that would normally be accumulated over years of service in a plan to set up in competition later will not be regarded as amounting to gross misconduct.

The fact that Directors owe a greater duty to their employer than employees (even senior employees) was highlighted in the recent case in the Court of Appeal, Ranson v Customer Systems Plc. This distinction applies to how reasonable it is for an employer to take action against an employee during a notice period in regard to their steps to set up in competition once the notice period has ended. This case concerned a very important and senior employee who met his employer's clients with a view to securing their business for his own company after  his resignation. In the lower courts the former employer argued that as a senior employee the individual owed a duty to report the meetings he had with his employers clients while still in their employment. The Court of Appeal noted that this enhanced duty of loyalty and fidelity (ie a fiduciary duty) applied to directors, but not to employees. In this case the employee had made preparations for setting up a company in competition with his employer. He had also discussed potential work with clients who had approached him. This had resulted in orders being placed with his new company before he actually left his current employer. The High Court had found in favour of the former employer, but in doing so had relied on cases that related to directors and the duties director owe to their company. The Court of Appeal concluded that there were clear differences between the duties owed by employees (even if they are senior employees) and directors. The court also rejected an argument that there was a general duty which required the employee to report his meetings with his employer's customers. It ruled that there is no duty on an employee to report to his employer that he is carrying out work outside that employment in breach of his contract. On this basis the Court of Appeal ruled that the employee had not been in breach of contract or of a fiduciary duty by failing to report his contact with clients of his employer or his plan to set up in competition.

The practical point to be taken from these cases is that if an employer wishes to restrict or prevent an employee from taking steps to compete or approach its clients or customers it must include a specific restriction in the contract of employment that covers the precise situation.

At Hallett Employment Law Services Ltd we can help you draw up suitable contracts of employment to address the issues raised in this article and give advice on dealing with the issue of competition from employees. If you require further support on these matters do not hesitate to contact us.                  

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