How far can employees go without breaching their contracts?
In a sting by Channel 4’s ‘Dispatches’ programme MPs Jack Straw and Malcolm Rifkind were filmed in conversations about securing consultancy opportunities outside of their Parliamentary work. More recently allegations have emerged about Conservative party chairman Grant Shapps’ business dealings while an MP.
But what is the position for ordinary employees who are preparing to leave their jobs and start their own business? This is a notoriously grey area, and each case is dependent on its facts. But case law has established there is a line which current employees cannot cross without risking a breach of their employment contracts and only limited steps taken during employment, with the real arrangements made only after employment ceases, are likely to stay on the right side of that line.
Every employment contract contains the implied term that the employee will serve their employer with good faith and fidelity. This term may extend beyond the termination of the employment contract if the employee holds a position of particular responsibility or seniority. Company directors, for example, have more onerous duties and responsibilities towards the organisation they work for. Somebody in this kind of role might be required to disclose fully to their employer any plans to set up in competition.
High Court
In the most recent case in this area, Re-use Collections v Sendall, the High Court had to decide whether a senior employee, formerly a director of the company, had gone too far in his involvement in preparing to set up a business which would compete with his employer while he was still employed.
Sendall argued that all he had done while still an employee of Re-use was provide the finance for his sons to set up a new company. However, the court held that this alone would have been enough to put him in breach of the duty of good faith and fidelity, as having a major financial interest in the new company meant he was unable to serve his current company conscientiously. The employer also argued that Sendall owed it more duties associated with the role of director, but this was rejected by the court.
Employers often use restrictive covenants in their employment contracts to protect their businesses from departing employees going to work for a competitor. While Sendall’s contract contained such terms, he argued they were unenforceable due to a lack of a ‘consideration’ (payment, in this context) even though he had received a pay rise at the time he signed the employment contract. The court found that the pay increase was not stated to be conditional or linked to him agreeing to the restrictions and they were, therefore, unenforceable.
Checklist
Not every senior or well paid employee will owe a company the same kind of duties as a director of that company. Whether this is the case or not depends on the circumstances of the employee’s position. There are other lessons arising from this case. Employers should:
- ensure employees sign a comprehensive contract of employment before or at the time they start work. If employees are asked to enter into new restrictive covenants, they should receive an additional payment at that time, over and above any routine pay rises
- include an express confidentiality clause in employment contracts to prevent misuse of company information during employment. Relying on the duty of good faith and fidelity implied in every employment contract may not provide the protection the employer requires
- check that their post-termination restrictive covenants are carefully drafted and no wider in scope, or longer in duration, than is reasonably necessary to protect the employer’s legitimate business interests – otherwise they are likely to be unenforceable.
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