Legal View – Employees setting up in competition while still employed

legal A recent case in the Court of Appeal has established that it is no longer safe to rely on the implied duty of fidelity which was always thought to prevent an employee from putting his own interests before those of his employer, for example by secretly taking steps, while still employed, to set up in competition with the employer and “tapping up” the employer’s customers with that in mind.

It is important to distinguish between “senior” and “other” employees. Company directors, and a few extremely senior employees, owe fiduciary duties to the employer.

These duties are duties of the utmost good faith including a duty not to put his or her own interests before those of the employer and not to conceal from the employer his or her own wrongdoing or that of others of which he or she is aware.

However, the recent case has demonstrated that for most employees, who typically do not owe fiduciary duties, there are real and worrying limits on the implied duty of fidelity.

An employee had taken the following steps whilst still employed:-

  •  Spent two years preparing to establish a competing business;
  • Set up a company which would be the vehicle for conducting that business;
  • Discussed business plans with a colleague;
  • Registered a domain name for the new company and opened a bank account and prepared business plans for it;
  • Extracted a large quantity of contact numbers from his company mobile phone; and even
  • Had meetings and discussions with clients of the employer with a view to them becoming clients of his new company later on.

Despite these apparent breaches of fidelity, the Court of Appeal found that these actions were merely “paving the way” for the future competing activities and that the employer had suffered no loss from any of them and found in favour of the employee.

Barry Warne, Head of Employment at hlw Keeble Hawson commented “this case demonstrates the importance of having express duties of fidelity written into all contracts of employment, as well as re-emphasising the importance of having well drafted restrictive covenants on post-termination competitive activity in the employment contracts of senior staff and directors”.

Legal commentary provided by hlw Keeble Hawson LLP