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When Does Entrepreneurial Spirit Become Breach of Contract?

You may have read my blog regarding the fairness of a dismissal of two employees who were dismissed for gross misconduct, on the grounds that they had been planning to set up in business in competition with their employer.

In the Employment Tribunal's judgment, an intention to set up in business in competition with your employer is not enough to justify a Dismissal. I have read another interesting case recently, Ranson v Customer Systems plc dealing with similar issues.

Again the issue here to determine was, when does entrepreneurial spirit and an intention to compete with your employer become a breach of your contract of employment and a breach of the obligations you owe to your employer?

The judgment in this case concentrated on two factors:

•    to what extent does the duty of fidelity, that an employee owes to their employer that they will serve their employer with good faith and fidelity impose an obligation on the employee to report any meetings with clients during his notice period to discuss future prospects and;

•    under what circumstances does an employee owe the more onerous fiduciary obligations, more commonly owed between director and a company.     

The Judgment made it clear that the duty of fidelity does not place the employee in a position where he is obliged to pursue his employer's interest at the expense of his own. Although the employee undertakes to serve his master with good faith and fidelity, those obligations can only be extended if they are expressly imposed within the employment contract and each party must have regard to the interests of the other. The concept of the fiduciary duty however is a "single minded duty to act in the interests of another" and stems from a director, in effect being treated as "trustee" of the assets of the company. This is very different to the implied obligations within an employment relationship.

In this case, it was held that the employee did not breach his duty of fidelity in not reporting to his employers the discussions with the employer's clients. The Judgment qualified the decision by scrutinising the employee's role, his actions and the financial impact on the employer. However, it is evident again that a freedom to compete on your own account after the termination of employment and preparing for that, before the employment relationship has ended, is not a breach of an employee's obligations unless there are contractual restrictions. In this case, there were no contractual restrictions.

The Judgment made clear, that the starting point, if an employer intended on imposing more obligations on an employee, was the employee's contract of employment. These restrictions and obligations imposed, can be extended to a fiduciary duty, as long as the obligations and restrictions are consistent and commensurate with the seniority and job role of the employee.

We will always seek to protect employee's rights and their freedom to compete and utilise their skills in the market without onerous restrictions. The Judgment has emphasised that if the employer seeks to protect their position, they must unequivocally and pro-actively do so, by incorporating appropriate provisions in the employee's contract and updating these as the employee is promoted through the ranks.

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