You’ve recently resigned from your employment and are looking to set up a competing business with your employer. Is that ok?
Well, it depends.
Do you have a restraint of trade/non-compete (can’t set up a business in competition), non-dealing (can’t work with former clients) or non-solicitation (can’t approach former clients or employees) clause in your employment agreement?
When will you set up your new business – while you’re working out your notice period or on garden leave or only after your employment ends?
Have you started advertising your new services? Started up a website? Contacted your former clients or given your new business details to them when they’ve asked? Approached a co-worker to see if they want to join your new business too?
The notice period – an employee’s duty of fidelity
The first thing you need to know is that every employee owes their employer what is known as ‘a duty of fidelity’, regardless of whether they also have a restraint of trade, non-dealing or non-solicitation clause in their employment agreement.
The duty exists so long as the employment relationship is ‘on foot’, which includes when you are working out your notice period or have been directed to stay away from the workplace over your notice period on ‘garden leave’.
The duty requires an employee not to do anything deliberately that is likely to injure their employer’s business. It can include (except with the employer’s prior knowledge and consent):
- competing with the employer directly
- working for a competitor
- assisting another person to compete with the employer
- attempting to solicit clients prior to finishing up at a workplace
- failing to reject an offer of work from a client and failing to report that approach to the employer
- attempting to solicit fellow employees (to try and get them to leave the employer and join the competing business)
- emailing confidential information to yourself before you leave the employer or simply retaining confidential information in hardcopy or memory.
For senior employees, including director employees, it may go as far as requiring those employees to advise their employer before they begin competing that they are intending to do so or if they are aware that another employee is operating a competing business or is soliciting clients or fellow employees.
While care still needs to be taken in this respect, and it will be fact specific as to whether an employee has gone too far, the duty will not necessarily preclude some preparatory steps before employment ends. For example, incorporating a new company, arranging bank funding and purchasing or hiring plant or equipment for the new business.
However, if an employer can show that such steps did in fact undermine them while you were still employed, then even preparatory steps may fall foul. The more public the steps, the more care that will need to be taken.
Restraints of trade/non-compete, non-dealing and non-solicitation clauses
But what if you’re through your notice period – what then?
If you have a restraint of trade/non-compete, non-dealing or non-solicitation clause in your employment agreement, then these may also put a handbrake on what you can do post-employment for a period of time.
An employer does have to show that these clauses are reasonable before they will be enforced. However, in some notable recent cases, these clauses have been upheld, at considerable cost for former employees, where the employees set up competing businesses, acted for former clients, or solicited former clients or co-workers.
So what is reasonable? This takes into account things like:
- does your employer have a legitimate interest to protect, like customer relationships or trade secrets? This includes considering the nature of your role, whether you had/have a close relationship with clients or fellow employees and whether you were/are in a position to be able to influence them.
- does the clause only go so far as is necessary to protect that interest, such as only applying for a reasonable amount of time (i.e. only so long as the employer needs to protect its legitimate interest, e.g. the time needed to reestablish a relationship with its clients) for or a reasonable, defined geographical location (i.e. the area in which the employer operates/draws its clients from)?
- were you compensated for agreeing to the clause, either via your original employment agreement or, if a clause was added later, by some additional benefit?
While, again, every case is fact specific, if you’re say a well-remunerated, senior employee who worked closely with your employer’s clients over the course of your employment and you were in a position to influence those clients, a clause in your original employment agreement precluding you from acting for those former clients for a period of say 3 months could well be enforceable.
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If you’re looking to leave your employment and set up a competing business, we’re only too happy to review your circumstances and provide advice on how best to move forward. Equally if you’re an employer wondering about your position in respect to an employee who has resigned, we can also assist. Please contact one of our employment team at Employment@parryfield.com for further assistance.
