The High Court has partially upheld an application for summary judgment against a senior employee who tried to transplant his employer’s business to a competitor. His plan included taking over the employer’s premises, incorporating a company with a similar name and facilitating the recruitment by the competitor of a substantial section of the employer’s workforce. Despite the absence of any post-termination restrictive covenants, or any express terms regarding confidential information, the court found that the employee had broken his implied duty of fidelity.
This case shows how useful implied terms can be in protecting an employer’s business, especially where employees are engaged in competitive activity during their employment. However, protecting a business from similar activity after employment ends is much harder to achieve without express terms.
The duty of fidelity: Every employment contract contains an implied term that an employee will serve their employer with good faith and fidelity (the duty of fidelity). The duty of fidelity is owed by all employees and is to be distinguished from a fiduciary duty.
A fiduciary duty requires an employee to act in the interests of their employer, whereas the duty of fidelity merely requires an employee to have regard to their employer’s interests. It does not require the employee to subjugate their interests to those of the employer.
A number of potential aspects of the duty of fidelity have been identified in case law, including:
- A duty not to compete. An employee may not work in competition with their employer. The duty applies during working hours and does not extend after termination of the contract of employment. Express contractual provision is therefore required to restrict competition on termination of employment
- A duty of confidentiality. During the course of employment the employee must not:
- disclose to third parties the employer’s confidential information and trade secrets obtained during the course of, and as a result of, the employment, or
- use the employer’s confidential information for his own purposes
- Confidential information includes information which an employee is told is confidential or which, from its character, is obviously confidential. After employment has ended, the implied duty of confidentiality survives but only to the extent that it protects trade secrets. Other confidential information can only be protected by means of an express term
- A duty not to entice employees. An employee must not, while still employed, entice fellow employees to leave employment (usually so as to work in competition with the employer). However, acts which are merely preparatory may not constitute a breach. This duty does not apply after employment, but it is common for contracts to contain express terms seeking to restrict former employees from enticing existing employees
The content of this update is for general information only and does not constitute legal advice. It states the law as at December 2013. We recommend that specific professional advice is obtained on any particular matter. We do not accept responsibility for any loss arising as a result of the use of the information contained in this update.