Business mentor: Restraints force ex-employees to toe the line

Q: What protection do I have if an employee leaves and starts up in competition?

A: Alison Gray of the Chapman Tripp Employment Law Team replies:

Legal protection

Employees owe duties of loyalty and confidentiality to their employers. These obligations prevent employees from undermining their employers' business, or acting in a manner inconsistent with their employers' interests.

Employers may be surprised to learn that they cannot prevent former employees from starting their own competing business, unless there is a valid restraint of trade in the employee's employment agreement. A former employee also cannot be prevented from contacting or approaching the employers' customers, unless there is a valid restraint of trade. But there are certain things a former employee cannot do. In particular they cannot:

* Use the employer's confidential information to compete. What amounts to confidential information depends on the facts of each case.

* Take customer lists with them (or deliberately memorise customer lists) when they leave.

* Approach the employer's customers in relation to a transaction current when they left employment.

Steps to take

If an employer suspects that a former employee may have breached their duty to be loyal, or is misusing confidential information, then if appropriate, the employer (or its lawyers) could write a letter to them, setting out their obligations and why the employer believes these have been breached. It would also explain what the employer would like the former employee to do and what the employer will do to protect its rights if the ex-employee does not remedy the breach. If an initial letter does not work, or is inappropriate in the circumstances, the employer may go to court seeking one or more of the following:

* Damages against the former employee or their company or new employer.

* An injunction.

* An order that the former employee pays some or all of their profits to the employer.

* Return objects/information belonging to the employer.

* Costs.

The employer will need to prove the former employee's breach. This may be difficult if the evidence is purely circumstantial. But if there is no alternative explanation, the court may infer that confidential information has been misused or breach of contract has occurred and make one or more of the orders listed above.

Planning ahead

An employer need not simply rely on the basic law. A well-drafted employment agreement will contain clauses to assist an employer if a former employee sets up in competition. The following clauses can be useful:

* Restraints of trade. This restricts the former employee's freedom for a set period after employment ends, for example, by stopping the employee from competing, or from approaching other employees or customers, or from dealing with customers who approach them.

* Confidential information clause. This prevents the former employee from revealing confidential information obtained during employment. This is particularly helpful if it defines what the employer considers to be part of its confidential information.

* Garden leave clause. This allows the employer to send the employee home (on full pay) during the notice period, thus restricting access to confidential information and customers. The employee is also not allowed to start other employment.

Unless there is a valid restraint of trade, an employer cannot simply prevent a former employee from competing. But if a former employee misuses the employer's confidential information then relief may be available in the form of damages, injunctions or other orders.

* Alison.gray@chapmantripp.com