06/08/12

Don't get stopped before you've even got started, lawyer warns

Entrepreneurs looking to set up a business while working for someone else need to make sure they don’t fall foul of the law, says Stuart Love from the Dispute Resolution team at Kings Hill-based Vertex Law.

A long series of court cases has helped clarify what steps people can and can't take when planning to set up a business that will compete with their existing employer's.

Every employment relationship contains an implied duty that the employee will serve the employer with good faith.

This implied term generally lasts only during employment, however, if an employee is also a director and/or holds a senior position, it may continue after the employment ends.

There may also be other restrictions within the terms of employment, called 'restrictive covenants', which seek to restrict an employee's activities after his employment has ended.

In 2007, the High Court decided an employee planning to set up a competing business in the future was not restricted from discussing his plans with family and friends as this would not, in itself, conflict with the interests of the employer.

Further, the court held that consulting lawyers and other professionals was also not necessarily a breach of an employee’s obligations.

However, carrying on trade in competition with the employer and soliciting its customers would be a breach of duty.

In a more recent case, the High Court set out some guidelines, namely that the employee, while still employed:

• could plan for the future, set up a new company and create business plans
• was entitled to see what opportunities were available
• was not able to explore these opportunities further, for example by contacting existing clients
• was not allowed to pursue opportunities for his new company without telling his employer
• could not try to seek work from his employer’s customers.

This High Court decision highlights the potential pitfalls that employees who wish to leave their employer and set up in competition face and the dangers of attempting to get a head start.

The expense and time involved in defending such a claim can be the difference between a start up launching successfully, or failing before it has got going.