Are your employees obliged to disclose their intention to compete?

If you are a business owner, you will know that dealing with the departure of employees can be a time consuming distraction from the day to day running of your business.

A recent case highlights this, and the legal complexities in protecting your business from employee competition.  Two mid-ranking employees of the MPT Group, a supplier to the mattress manufacturing industry, resigned from the company and planned to set up in direct competition. On resignation, both employees were asked about their future plans; both deliberately misled their employer about their intention to compete.

On termination of employment both employees were subject to 6 month non-solicitation and non-dealing restrictions, which meant they were prevented (whilst acting for a competitor) from approaching or dealing with clients of MPT. Shortly after the 6 month period had elapsed they set up MattressTek Limited which was in direct competition with MPT. MPT brought claims against both former employees and MattressTek, including an injunction based in part on an alleged breach of duty to answer questions about their future intentions truthfully.

Employment contracts contain an implied term that employees will serve employers in good faith and fidelity. Employees should not act in conflict of interest or make a secret profit. MPT claimed that the exiting employees had breached their duty of fidelity.

The High Court held that, although there was a general duty on employees to answer questions truthfully, the duty of fidelity did not include an obligation to explain an employee’s confidential plans to set up in lawful competition. In addition, the employees were not senior enough for the company to argue that they owed fiduciary duties. Fiduciary duties are more onerous and can arise in an employment relationship where an employee is considered to be in a position of trust and exercise a considerable amount of discretion and authority over company matters.

In short, therefore, and especially in the case of middle managers who are not sufficiently senior to be considered ‘fiduciaries’, employers must take steps to protect their business interests by implementing adequate post-termination restrictions.  When client-facing employees have left, employers should use the restricted period to re-enforce relationships with their existing clients. However, this case is a salutary lesson that, once restrictions end and unless there is some other evidence of wrongdoing such as theft of confidential data, many employees will be free to compete regardless of their earlier dishonesty about future plans.