Got an employee who is setting up a rival business? Here’s what you need to know

We’ve all heard the tales of talented employees who join a business, build their own database of potential clients and suppliers, and then leave to set up a rival business, and try to poach more of your staff while they’re at it.

While competition is the nature of business, this strategy isn’t as easy as one short sentence can make it sound. If found guilty of breaching employer trust or confidentiality, an employee could face a hefty payout against them.

Of course, if nothing else, you are at risk of losing potentially talented staff.

So what steps should you, as an employer, take when you suspect that one or more of your employees is preparing to set up, or has already set up, a business to compete with you?

Step one: gather as much information as possible

This is where you can pretend to be Sherlock Holmes and go on a fact-finding mission.

As an employer, you will have the right to conduct workplace monitoring in a number of ways, for example:

  • Reviewing CCTV footage of your premises’ cameras.
  • Opening mail or email that concerns the business, regardless of the recipient.
  • Using automated software to check emails.
  • Checking phone logs and recording phone calls.
  • Gathering information through ‘point of sale’ terminals, like a supermarket checkout, to observe the performance of employees.

Of course, in many circumstances, you should inform your staff—in writing—before you begin or introduce a method of monitoring that you will be monitoring them. By doing this, your actions and your intentions, as an employer, remain transparent. Informing your staff could, also, act as a deterrent for any employees who might otherwise have committed some type of wrongful behaviour.

Before you begin your monitoring, compile a thorough assessment of the benefits of the monitoring. On the other side, also include any potential negative effects that monitoring could produce.

Step two: Suspend the employee

Obviously, if you didn’t find anything then you might have been chasing a wild goose. However, if you did find something, and you have a genuine concern about it, you can suspend your employee (on full pay) while you continue your investigation.

Your staff will be curious—make it clear that a suspension is not a sanction while your investigation is ongoing.

An alternative to suspending your employee(s) is to dismiss them immediately (without notice) for gross misconduct. If you choose to go down this dismissal route, you need to have strong, incontrovertible evidence to support your genuine belief that your employee(s) were planning to leave to set up a competing business.

Bear in mind that if you do summarily dismiss someone they are likely to go through your company’s appeals process. If you dismiss their appeal, you should expect them to make a claim for unfair dismissal to the Employment Tribunal.

For this reason, suspending your employee before you dismiss them could demonstrate a thorough effort to find as much evidence as possible on your part.

Step three: Establish the role of your employee in the business

We’re about to get a little bit technical-legal so hold on.

Ultimately, what you, as an employer, want to prove is that by setting up, or taking steps to set up a competing business, your employee has breached their contract/the covenants that they signed when they joined your organisation.

You should make sure that you know the role of every single employee in your business. Everyone should have an up-to-date contract of employment, and you should know who is a senior employee, and who isn’t.

Company directors and senior employees usually owe a ‘fiduciary’ duty to the employer. That is to say, a duty to put the interests of the employer before personal interests. In addition, the duty extends to not concealing anything from the employer—including wrongdoing, or the wrongdoing of another person, of which the senior employee is aware.

However, this ‘fiduciary’ business can get a little muddy.

If, for example, a low-level employee uses a work laptop, they are in custody of company property. If that employee or another junior employee has a list of contacts that belongs to the business, then they are again in custody of company property, even if this time it’s more abstract than the physical laptop.

What this means, is that the employee may use such property only for purposes that are bona fide (in the legal sense it means genuine and without intention to deceive) for the benefit of the employer.

In this sense, low-level employees can fit into the fiduciary duty category, too.

Step four: prevent it from happening again

To stop this from happening to your business (or happening again), you should make sure that you include reasonable post-termination restrictions in an employee’s contract of employment.

This can be somewhat tricky. Contractual restrictions of this nature must be for a finite period, and tailored to the role of the employee.

For directors and senior employees, a 12-month restriction would normally be reasonable, given their great business acumen and knowledge of your business.

Junior employees or new starters—three months, sometimes no length of time at all.

You might also include restrictive clauses that prevent one of your employees leaving to join one of your direct competitors.

The same principles apply—longer restriction for higher-level employees.

Shorter restrictions for juniors. After all, certain industries such as retail experience employees moving from one business to the next frequently.

Your evidence matters

In the case of Khan and Anor V Ladsker Child Care Limited, an Employment Appeal Tribunal found that an employer had unfairly dismissed two employees who had been taking preliminary steps to set up a business because the employees had no enforceable covenants in their contracts regarding the act.

For this reason, drafting up your employees’ contracts requires you to be thoroughly diligent. The line between preparing to compete, and actually creating the business is a very fine one that will, doubtless, be visited many times.

AUTHOR: Alastair Brown is the chief technical officer at Bright HR – Alastair is responsible for driving forward BrightHR’s expansion plans and the management of the businesses technological needs


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