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Employees setting up in competition

Posted on July 06, 2012

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Employees setting up in competition

What can be done about employees who want to leave to set up in competition? The most obvious answer is to carefully draft the employment contract to cover both their employment and post termination restrictions. If post termination restrictions are reasonable in terms and scope, they will be enforceable if their intention is to protect legitimate business interests such as client goodwill etc.


Can you sack someone for planning a new business? In Khan v Ladsker Child Care Ltd this month the EAT looked at whether it was gross misconduct for an employee to take preliminary steps towards setting up in competition with his employer. In that case Mr Khan put together a detailed business plan for a new business which when operational would compete with Ladsker. To do so Khan made use of the expertise gained during employment. The EAT said that this could be gross misconduct, but to do so it would have to amount to a fundamental breach of the employment contract; subject always to common law limits on restraint of trade.


In Ranson v Customer Systems Plc an employee resigned and set up his own business. Some of his work came from discussions during his notice period. His employer claimed he had breached ‘fiduciary duties’ by not telling them about those discussions. The Court of Appeal disagreed. Whilst Directors owe a fiduciary duty in these circumstances, regular employees do not. There was nothing in the employment contract to prevent him from doing so.


The lesson in both these cases is if you are particularly concerned about the damage an employee could do if leaving to start up in competition, the starting point will always be to carefully draft the employment contract to get as much protection as possible.


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