Member Article

Local businesses advised to review employee contract terms

A leading law firm is warning businesses to be clear about employee contract terms after a recent Court of Appeal case ruling.

The court clarified the difference in the level of loyalty expected for an employee and a director, specifically when a person leaves an organisation to set up a competing business.

Partner and Head of Employment Katherine Maxwell said, “The country has experienced a huge morale boost with the Olympic and Paralympic Games, however the government continues to report disappointing levels of economic growth. I think it is now more important than ever for businesses to ensure they retain their customer base in order to grow and succeed, and employment terms are a great place to start.”

Many people are choosing to take their experience and set up their own business rather than stay with their existing employers in uncertain times, and this creates competition in the marketplace. The situation is further complicated if that person then uses their knowledge of the company’s clients, strategy and pricing in their new venture.

It is an established principle that directors have a duty to act in the best interests of the company they work for and owe an increased level of loyalty. In practice this means that they are obliged to notify the company if they intend to set up a competing business, or even if they are aware of another employee intending to set up in competition. These obligations are often referred to as ‘fiduciary duties’.

The Court of Appeal has recently looked into a case where an employee left a company and had spent the previous two years setting up a competing business, including meeting with clients of his employer with a view to making them his own clients in the future.

The court held that the man had breached an implied duty of good faith in taking confidential information belonging to his employers, however because his contract of employment did not specify any restrictions in setting up in competition or contacting old clients, they held that he had not breached his contract.

It was also noted by the Court of Appeal that if employees are not directors they do not have an implied fiduciary duty. If a company wants a degree of control over a former employee’s actions after their employment had ended, clear terms should be laid out in an enforceable contract of employment.

Katherine, who works with a number of clients advising on HR issues, continued, “The case shows the importance of including post termination restrictions within a contract of employment if you want to be able to prevent a former employee poaching your clients and offering the same service or product at a lower price.”

“We would always advise that any post termination restrictions should be drafted carefully if they are going to be enforceable. A court will not restrict an individual’s right to seek alternative employment if the terms are unreasonable or excessive. We can review contracts of employment to check if employers are protected against an employee acting in this manner.”

For more details visit www.mooreblatch.com or call 023 8071 8000.

This was posted in Bdaily's Members' News section by Liz Pusey .