When your employee becomes your competitor

Employers, big or small, are frequently faced with problems emanating from their employees competing with them.

These activities are numerous and vary from a direct competitor activity to redirecting employer business to a relative’s business.

They could also include using their employers’ infrastructure, for example, e-mail, telephone, and so on, as well as company time.

An employer’s biggest headache is that of employees leaving, joining a competitor and using their knowledge of the ex-employer’s confidential information (client list, fee structure, and so on), in the interests of the new employer.

The prohibition against this practice has its roots in the common law requirement that an employee devote his/her time and skills to furthering the interests of their employer’s business and not participate in activities that are in conflict with the employer’s business.

The same common law prohibits ex-employees from unfairly competing against ex-employers by using proprietary or confidential information of the ex-employer.

A contract of employment or separate restraint agreement could also include certain written restraint provisions and restrictions on certain conduct that is at odds with the interests of the employer.

These normally cover activities during or after an employee has left employment, for example:

l Restraining an employee from using or retaining confidential or sensitive documentation.

l A restraint on joining a competitor.

l A restraint on luring employees to join another employer.

The most common problem faced by employers lies in proving or substantiating damage and in proving that confidential or proprietary information was used.

There are many examples. They become very sensitive and legally complex when pertaining to senior managers/directors who are setting up a competitor business.

Employers should not merely latch on to some of the legal principles discussed in this article, because these cases are often complex and the evidential proof required is difficult to get.

For example, could an employee be dismissed merely because he/ she applied for a job at a competitor or is considering setting up a business in competition? The answers are legally complex.

Letters of appointment or even human resources policies would not necessarily detail all the employee conduct that will be unacceptable or could lead to dismissal.

Implied terms are important when determining the true extent of the employer and employee common law contractual rights and obligations. For example, at the time of signing the employment contract the parties would most probably not expressly agree that the employee may not steal or commit fraud or compete unfairly.

However, the courts will read into an employment contractual relationship an implied duty that the employee will not steal or compete unfairly.

Employees are cautioned to refrain from unlawful and unfair competition with ex-employers as such ex-employers do not need a written and signed restraint of trade in order to protect their confidential and proprietary information.

Implied common law obligations on employees include, for example:

l That employees may not work for another employer if such employers’ business interests are in conflict.

l That employees may not enter into any arrangement which creates a conflict of interest between their own interests and those of their employer, for example, buying stationery from a company owned by the employee’s wife. There is an implied obligation on an employee to disclose such dealings.

l That employees may not compete with their employer’s business for their own account, namely doing so-called private jobs.

l That employees may not secretly gain financially from company dealings, for example, receiving kickbacks.

l That employees may not make use of information gained in the course of their employment, even after they have left such employment, in a manner that is inconsistent with their duty to further the employer’s interest.

This occurs frequently where employees, at their new employer, use their previous employer’s client list or knowledge of costing/quotes to compete unfairly.

l That there is a duty on employees to further their employer’s business interests.

All of the above could be dismissible offences, but in many instances, employers have a problem in gathering sufficient evidence to prove their cases. In many instances, employers’ suspicions are strengthened by inadmissible hearsay evidence, which is generally insufficient to use in dismissing fairly.

Alternatively, professional advice should be obtained to, for example, evaluate whether the hearsay evidence, in the prevailing circumstances, could be admissible.

l Pierre Marais is with the Labour Law Group. Call him at 011 679 5944.