If your employee, or ex-employee, is setting up a competing business, this can be a serious threat to your success.
Nowadays, many workers are trying out start-ups while being employed. In this highly litigated field, having a solid plan in place to mitigate possible risks posed by competition is crucial. If you want to protect the future prosperity of your business, read on to learn what some of your options are.
Litigation Options
As a business owner, your priority should be to protect your current business from suffering any current or future losses due to competition. Luckily, there are laws and contracts put in place whose main purpose is to protect the interest of the employer.
Non-Compete Clause Violations
A non-compete agreement or contract refers to a written document signed by the employee in which they agree or commit not to directly compete with the employer during or after their employment period in the company. These legal conditions are written in your employment contracts which prohibit the employee from either starting a new job nearby or within a close time frame to their former or current job.
Usually, an employee has access to information that’s confidential or can be used as a competitive advantage. By restraining the other party from exploiting sensitive information or engaging in specific activities, non-compete provisions can be utilised as a defence against the rival business. Here are several scenarios in which a non-compete provision may be included in a contract:
- Employment contract: This is the agreement between an employer and his employee that contains all of the terms and conditions the employee must adhere to when employed. For example, in most employment contracts, a section bars or restricts an employee that holds a managerial position at a recruiting firm from applying for future opportunities in the human resources business for six months.
- Franchise agreement: The main purpose of this agreement is to protect the intellectual property of the franchisor. For example, if the franchisee is opening up a competing restaurant, then it can not be within a two-kilometre distance from the franchisee’s restaurant location.
- Contract Manufacturing: This type of contract prohibits a manufacturer from making the same types of components for another company. For example, a toy manufacturer may not be able to develop comparable toys for other companies.
If an employee has violated the non-compete clauses in the agreement, then they can be liable to hefty penalties ordered by the court.
Non-Compete Effectiveness
A non-compete agreement is often regarded as legally binding by courts. As long as the contract isn’t overly broad or restrictive, a judge should uphold it. However, there are times when such contracts are not enforceable due to the following reasons:
- The public might be harmed as a result or consequence. For example, if the contract somehow restricts business that depresses the local economy.
- If the amount of time for the non-compete to be in effect is considered “unreasonable” by the courts. For example, a contract that prohibits an employee from getting another job or starting a business indefinitely throughout his life would be considered unreasonable.
- Unreasonable geographic restrictions: prohibiting an employee from competing within a few miles is reasonable, whereas prohibiting them from competing anywhere in the globe is not.
Obtaining an employee’s agreement that has been hired already without delivering anything of value in exchange.
Confidentiality
Confidential information is any information regarding the employer that is not in the public domain. However, in the workplace, we are increasingly dependent on smartphones and cloud-based technologies. This makes the breach and misuse of confidential information fairly easy.
When your employee leaves for any reason at all, they must be exceedingly careful not to keep any private information from their previous employment. Financial data, client lists, commercial secrets, and intellectual property are all examples of confidential information. If you discover evidence that an employee has obtained sensitive information, then your company can bring legal action against that employee, seeking damages and expenses among other things. Breaching confidentiality as an employee can have severe consequences.
The Implied Duty of Good Faith
Implied terms are those that the law imposes on a contract notwithstanding the parties’ failure to explicitly address or allude to them in the contract. They can be deduced from legislation or common law.
In Australian contract law, the implied obligation of good faith refers to a basic principle that applies to all transactions in which one party implicitly agrees to do everything necessary on his part to enable the other to benefit from the contract. Accordingly, if an employee starts a business that is detrimental to the firm for which he is already employed, this may be regarded as a breach of the implicit conditions of the contract.
Employee Poaching
Employee poaching refers to an employee taking away clients or customers from his current or former job and bringing them to his new business. Along with employees, competitors can also poach clients. If your employee encourages other employees to break their employment contracts and poaches them and their clients for his own business, then the employee may be held accountable. Depending on what evidence you find, you may bring legal action against the employee and their new employer for violating the contract, as well as for instigating and promoting such a violation.
If the employee contract already pertains to a clause that prohibits client or employee poaching, then legal action could be taken which includes the employee being fired as well as having to pay for damages.
Key Takeaways
- Non-compete clauses are the terms in an employee’s contract that have conditions that may inhibit them from starting a business that directly competes with your own.
- For the non-compete to be effective, certain conditions have to be met.
- If you can prove that your employee has breached confidentiality to gain a competitive advantage, you can pursue legal action.
- The rule of the implied duty of good faith strongly discourages an employee from doing something that goes against their current company’s best interests.
- If your employee encourages other employees to break their employment contracts and poaches them and their clients for their own business, then the employee may be held accountable.
Hire a Legal Expert
While choosing what actions to take to stop an employee from starting a competing business can seem like a daunting task, you will need to consider the legalities to know the best course of action.
If you decide to take any legal action against the employee then lawyers at Lazarus Legal can assist you in negotiation, dispute resolution, or even litigation.
Lazarus Legal offers a staff of highly skilled and experienced lawyers that can assist with a variety of commercial and legal matters. Contact us today to learn more about how we can help you with legal issues.
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Mark Lazarus
Mark Lazarus, the visionary behind the business and the fresh blood of the Lazarus Legal team, Mark (or Laz as he is often known) owes much of his success to his past experiences. And he’s made it his personal goal to bring that wisdom and formula to the firm.
1 thought on “My Employee Is Setting Up A Competing Business, What Are My Options?”
My employee registered his own company still offering the same services, i did an investigation and the company is in his names. but when i sat him down he denied that the company is not his however i have all the proof but he is till denying everything. Please advise.
Regards