Employers need to protect themselves and their customer base, and this can be done whilst the employee is employed by them.
A valid contractual restraint binds the employee after termination which can prevent them taking your clients away.
Protecting your client base and formalising employment contracts is important.
An employee has an implied fiduciary duty to act in the interests of the employer with fidelity and good faith irrespective of whether there is a written employment contract.
In the recent decision of Digital Pulse Pty Ltd v Christopher Harris & Ors,two employees were found to have breached this duty by diverting customers of their employer without consent to a business venture they had established whilst still employed. The court found that the activities of the employees were:
calculated to produce profit for themselves and harm a vulnerable employer
the diversions were carefully planned
the employees exulted in their success
the employees were prepared to misappropriate confidential information.
Perhaps the conduct of the employees is best described in an email Mr Eden,one of the employees involved, sent to a friend less than two weeks after leaving the employment of the employer, which read as follows:
'I have started a new company 'Juice-d media'. I have hooked up with a sales guy and we are
getting s....... of good contracts. Enough to keep everything paid for the first twelve months at
least. Having a few problems with my old company `Digital Pulse' and it looks like I will have to
take official action. Don't know why they are playing the game. The stupid bastards have no idea
what's in store for them if they proceed. They owe me a few $K and if they don't sort me out I go
them for everything."
The court held that the employees actions demonstrated a deliberate wrongdoing for profit, were in contumelious disregard of the employers rights,and was deserving of special condemnation and punishment.
Accordingly, for the first time in New South Wales the court held that in addition to the usual remedy of the employees having to account for the profits made, they should also pay exemplary damages of $10,000 each. One of the purposes of exemplary damages is to punish a wrongdoer for reprehensible conduct.
The decision was then appealed, with the main focus being on the award of exemplary damages. On 7 February 2003, the Court of Appeal handed down its decision and in New South Wales there is no power for a court to award exemplary damages for breach of a fiduciary duty by an employee.
The decision on appeal is significant because it again limits the employer's remedy for breach of fiduciary duty by an employee to an account of profits or equitable compensation.
Employers, in order to protect themselves and their customer base, should not rest solely upon the implied duty of fidelity and good faith owed by an employee. Whilst this duty applies during the course of employment, it becomes limited after termination.
If an employee is not bound by a valid contractual restraint that binds them after termination, the employee can take away and utilise the benefit of personal relationships built up with particular customers and may solicit any customer whom the employee can recall without the aid of a list taken from the former employer and without deliberate memorisation of a customer list.
Clearly, this has the potential to ruin or substantially impact upon an employer especially if a particular employee has considerable contact with important clients.
All employees, regardless of their position, should be engaged under an employment contract and, where appropriate, the employment agreement should be designed to limit the potential for dispute in the future as to whether the employee is bound by an implied term of fidelity and good faith and the extent of that obligation. If an employer wishes to protect confidential information then it is far better to expressly set out in an agreement what it consists of.
Given the potential damage that can be caused by employees leaving, it is wise for an employer to ensure that all employment agreements cover these essential elements. We can assist in this process by preparing contracts both for administrative staff and those at a more senior or executive level.
Even if your employees have signed an employment contract, these should be reviewed annually or whenever you seek to change the terms of employment, such as a promotion to ensure that they are up-to-date. For example, if a person is originally employed as a clerk but is about to become a manager, you may wish to include additional provisions relating to restrictive covenants.
This Information Outline is provided courtesy of Matthews Folbigg who are experienced in this area of law. They are located at Level 7 The Barrington, 10-14 Smith Street, Parramatta NSW 2124 or call them on (02) 9635-7966 if you would like more information on this legal topic, or you wish to obtain formal advice regarding your situation.
MatthewsFolbigg is a large commercial law firm based in Parramatta, New South Wales. The firm has Accredited Specialists in Business Law, Property,Immigration, Family Law and Personal Injury. MatthewsFolbigg has specialist groups advising clients in corporate structures, intellectual property, and information technology plus franchising, estate planning and insolvency work.