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Competing with Former Employees
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By: Charlene Sell
As a nation we don't look favourably on people who gain an unfair advantage over their competition. The New Zealand public were outraged when Belarusian shot putter Nadzeya Ostapchuk was found to have taken performance enhancing drugs at the recent London Olympics. She was stripped of her gold medal and told to hand it over to New Zealander Valerie Adams.
In a different context, our Employment Court has recently admonished employees who took advantage of information obtained from their employment to gain an unfair head start in their new competing business. The Employer was awarded $4,290,000.00 against its former employees.
Such a large damages award against former employees is unprecedented. This should provide a considerable boost to employers faced with current or former employees who have breached employment obligations in these circumstances.
Rooney Earthmoving Limited v McTague
This decision concerned a claim by the employer, Rooney Earthmoving Limited (REL) against three senior former employees, Mr McTague, Mr Whiting and Mr Bartlett (the defendants). The Employment Court found that the defendants breached various duties they owed REL while they were still employed.
The defendants were not subject to specific non-solicitation clauses or restraints of trade. While it was accepted, therefore, that the defendants did not owe any duties to REL after their employment ended, the Employment Court found they had breached various implied duties while they were still employed by REL.
The defendants were found to have breached duties of fidelity and trust and confidence owed to REL in the following ways:
Encouraging other employees of REL to join the defendants' new business, BMW Contracting Limited (BMW);
Soliciting work from REL's clients for BMW;
Using quotations obtained by REL to undercut REL's pricing for BMW's benefit;
Obtaining REL's client list;
Destroying confidential information belonging to REL relating to ongoing contracts.
The solicitors for REL suggested that the defendants were required to inform REL of their intention to establish a competing business. The Judge was not convinced that the defendants had such an obligation. However, he found that the defendants were required to disclose to REL any steps they or other employees had taken to solicit work or employees from REL for their own benefit.
It is accepted that employees are entitled to take preparatory steps to establish a new business while they are still employed provided those steps do not breach duties owed to their employer. Examples of permissible steps which will not give rise to a claim for breach of duty include incorporating a company, arranging finance or purchasing equipment.
REL's claim was brought a number of years after the relevant events took place. This meant the Court was able to assess damages based on REL's actual losses. It is rare for the Court to have historical information since an employer will usually bring a claim shortly after discovering the employee's breach and before actual losses are fully known. In those circumstances the Court will assess damages based on an estimate of possible future losses, which is more difficult to quantify.
The Judge found that the defendants' actions were the sole cause of the loss of REL's customers and revenue over the three year period for which REL sought damages. The defendants received a springboard advantage for BMW which gave them a head start they would not have received but for the breach of the defendants' duties owed to REL.
The effect of this decision is that employers now have a real incentive to challenge former employees who set up a competing business on the back of information and contacts gained while working for their previous employer.
What can you do to protect your business?
It is best to try to pre-empt potential breaches by employees. We recommend you include specific provisions in your employment agreement rather than rely on possible implied duties. There will be no doubt what an employee's obligations are if these are spelt out in their employment agreement.
We suggest you consider including the following provisions in your employment agreements:
No-competition clause prohibiting employees from competing with you while they are employed by you.
Confidentiality clause prohibiting employees from using or disclosing your confidential information for unauthorised purposes while employed and after their employment ends.
Garden leave clause allowing you to require the employee not to work at your workplace during the notice period. While you would still be required to pay the employee, the employee would not have access to your clients or confidential information. This will provide you with some protection if you are concerned about the employee soliciting clients or using confidential information for their own purposes. However, there is still a risk that the employee could breach their duties during the period between when they have decided to leave and when they hand you their resignation.
Non-solicitation clause prohibiting employees from soliciting clients or other employees while employed and for a specified period after employment has ended.
Restraint of trade clause prohibiting employees from working for a competitor or setting up a competing business for a specified period after employment ends. Care needs to be taken with these clauses to ensure the time frame and restraint area are sufficient to protect your proprietary interests without unduly impeding the employee's right to work. They will not be necessary in all industries and for all employees. Restraint of trade clauses are most often used in employment agreements for senior employees or employees with access to highly sensitive information.
We recommend you continually monitor the suitability of provisions within your employment agreement. An employee may have minimum obligations in their employment agreement when they first join your business, but as they move up the ranks it may be appropriate to negotiate more restrictive provisions.
If you would like us to review and update your standard employment agreement to include the clauses referred to above or advise you on what steps you may take if you suspect an employee has breached their duties in these circumstances, please contact a member of our Employment Law team.
Amanda Douglas, Partner: email email@example.com
Charlene Sell, Associate: email firstname.lastname@example.org
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