All employees owe obligations of loyalty and fidelity to their employer. But in reality, what does that mean if an employee wants to leave and set up in competition?
A recent case in the Employment Court, Rooney Earthmoving Limited and McTague 24/8/09, provides some useful guidance.
In this case, the company sought damages against three of its ex-employees for: taking its clients and key personnel; undermining its business; and removing confidential information. The hearing dealt with liability only, reserving damages for future consideration.
The employees all had significant experience in the earth moving industry and were all in positions of trust and confidence. The three staff planned to set up a competing business and to exit the company separately in a manner that would both undermine the company and give their own new business the best advantage. They took with them confidential information about the company’s clients as well as financial and pricing information in a deliberate attempt to undercut the company for their own benefit.
The company argued in the Employment Court that, as part of the duty of fidelity, the employees actually had a positive obligation to disclose to their employer their intention to leave and join a competitor or set up in competition. The Court considered New Zealand and UK cases for guidance. The UK cases support an obligation on employees, in certain circumstances, to disclose an intention to compete.
However, the New Zealand Courts are not so convinced. The Court relied on an earlier statement by Goddard CJ:
“We live in the era of management buyout. Employees can surely be at liberty to discuss their future plans with each other without facing the risk being reported as disloyal employees”.
The Court in Rooney ultimately found that law had not yet reached the point where the duty of fidelity includes having to disclose an intention to simply leave and compete, as that would undermine the freedom of movement of employees. Interestingly, it noted the position of employees who were also directors “may well be different”.
However, on the facts, the Court had little difficulty finding the employees had breached their duties of loyalty and fidelity in numerous respects. This included : soliciting staff to join their competing business; clearing the company’s whiteboard of confidential information; obtaining the company’s client lists; using quotations unlawfully obtained from the company to undercut it; and failing to disclose knowledge of client solicitation.
The company can now pursue a damages claim for any losses suffered.
The point for employers to note is that your employees cannot undermine your business while still working for you. However, that duty does not prevent staff discussing their own plans to join a competitor or set up in competition nor does it require them to disclose those plans. The possible exception is for employees who are also directors.