Setting up in competition with your employer – guidelines for employees

by Direct2Lawyers on July 20, 2012

  • SumoMe

The recent cases of Khan & Anor v Landsker Child Care Ltd and Ranson v Customer Systems plc highlight a potentially complex yet important area of law – whether and in what circumstances employees can plan to set up a business in competition with their employer. This post will therefore address 4 areas:

  1. What restrictions are there upon employees looking to set up a business in competition with their employer?
  2. What can happen if you’re caught planning to set up a business in competition?
  3. What remedies there may be against you if you set up a business in competition with your employer?
  4. What employees should do if they’re looking to set up a business in competition

What restrictions are there upon employees looking to set up a business in competition with their employer?

An employee who is preparing to set up a business in competition with their employer may be in breach of contract. The employee has a number of express and implied duties in their contract of employment. One of these implied duties is the duty of loyalty (also known as the duty of good faith). If an employee commits an act which is injurious to his employer and his employer’s interests it will generally be deemed a breach of this implied duty.

As well as the implied duty of good faith restraining the actions of employees, there may also be express contractual duties limiting the ability of a party to prepare to set up in business during employment or actually set up a competing business after their employment has ended. Terms restricting the activities of the employee are common in contracts of employment and are known as post-termination restrictive covenants. Such restrictive covenants may restrict the ability of the employee to, for example, set up a competing business in a restricted geographic area or it may restrict them from soliciting clients, employees or potential clients from their former employer.

What can happen if you’re caught planning to set up a business in competition?

If you’re caught setting up a business which may compete with your current employer then the potential ramifications depends on what you’ve actually done in planning the business. If you’ve simply engaged in a planning exercise using your hard-earned years of experience in a particular line of business then it would be hard to argue that this was a breach of the implied term of loyalty. However, if you’ve used confidential information which is a trade secret of your employer then you may be in more trouble. It would be likely in these circumstances that your act would be construed as gross misconduct, entitling your employer to terminate your contract without notice (but using the correct dismissal procedure). However, it all depends upon what is termed confidential, and particularly what a trade secret is. The lines here can often be blurred.

What remedies there may be against you if you set up a business in competition with your employer?

If you’ve actually set up a business in competition with your employer then it’s more than likely that you’ve terminated your contract with that employer. If you haven’t then it’s almost certain that this would be construed as a fundamental breach of contract entitling your employer to terminate your contract of employment.

If you’ve left your previous employment then your employer can’t stop you from setting up a business in competition unless your contract of employment contains the above-mentioned restrictive covenants. Should there be restrictive covenants contained within your contract of employment then your employer can seek to pursue you for damages and/or obtain an injunction against you.

What employees should do if they’re looking to set up a business in competition

  1. Check your contract of employment for express terms that prohibit (potentially) your preparing to set up a business in competition after you leave your employment. Further, look for the existence of restrictive covenants.
  2. Make sure that you make your plans without arousing suspicion. In the majority of cases little action can be taken against you for preparing to set up a business in competition but, all the same, it’s wise to avoid the sort of confrontation that arises in such a situation. Don’t work on these plans at work and try to tell as few people as possible.

Direct2Lawyers is a trading name of Redmans Solicitors, who specialise in no win no fee unfair dismissal cases and are compromise agreement solicitors

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