Think it's OK to start your new business in
your employer's time and poach the company's best customers?
Think again, says employment lawyer Lucia Vincent.
Lucia Vincent says stealing customers and other acts
that breach good faith are not OK.
Everyone wants those whom we love and trust to remain
faithful. No one likes being betrayed - even our pets must
live up to our expectations of fidelity.
But do we accept unfaithfulness and disloyalty in some
situations? Do I mind if my dog prefers someone else's
company if it means she's stopped barking? Is it ok to cheer
for Australia when they are playing France? Should values
like faithfulness and loyalty apply to our employment
Within our workplaces most would condemn an employee who sets
up their own business based on relationships with their
employer's clients while working.
But what if an employee's personality and long hours are the
main reason those relationships flourished? What about
promises from clients and colleagues to join a manager in
their new venture - is it fair to forget to pass on knowledge
of that allegiance to your soon-to-be former employer?
Some may feel as though they could morally justify their
behaviour because they worked hard without recognition or
didn't get the pay rise they deserved. But they would be
forgetting about the duty of fidelity and how much breaching
it can cost them if their employer takes disciplinary or
other action against them personally, not to mention the
devastating affect on their employer's business.
Gotta have good faith
Parties to employment relationships must deal with each other
in good faith even if a written agreement fails to say so.
The Employment Relations Act 2000 (Act) codified good faith
early on saying that at the very least an employer and
employee cannot directly or indirectly do anything that is
likely to or actually misleads or deceives the other.
In 2004 the Act added to its key provisions - that good faith
goes beyond the implied mutual obligations of trust and
confidence. Good faith requires parties to actively and
constructively establish and maintain a productive employment
relationship in which they are, among other things,
responsive and communicative.
But before Parliament even put pen to paper, the Courts
recognised the duty of fidelity in employment relationships.
Being faithful means that an employee must act in the best
interests of their existing employer. This precludes an
employee from using their employer's time to conduct
activities in competition or using business opportunities
that arose during employment to personal advantage (unless an
employer expressly consents to it).
It also requires an employee to inform their employer of all
information relevant to the business. Relevant information
would include an existing client promising business to an
employee after they have left or an opportunity arising
during work time to secure a commercial opportunity
personally or for the benefit of another party.
Being faithful to your employer does not necessarily prevent
an employee from taking steps outside of work hours to
prepare their business if they only start competing after
But an employee must be careful not to go too far and needs
to be aware of any other duties. For example, for an employee
to work on obtaining business from their employer's clients
before they actually finish work would be too far, and any
operative restraint of trade can hamper attempts to compete
post employment. The extent of the duty of fidelity depends
on the circumstances in the specific employment relationship,
but it usually stops at termination.
Passively stealing customers is not OK
But it's ok if customers come to you, right? Aaah, not if you
are still employed.
The Court of Appeal has made it clear that a Sales Manager
could breach the duty of fidelity by failing to pass on a key
client's concerns and going on to personally gaining by
obtaining significant work with that unhappy client (to the
detriment of their employer), all prior to resignation:
It is of no moment who makes the first approach. The duty
of an employee in such circumstances is to reject
categorically any such approach, to report it to his or her
employer along with any criticisms made of the employer and
to work with the employer to rectify any perceived
So it seems pretty clear that employees must be wary about
inappropriate customer loyalty and report any approaches from
customers to their employer. This enables the employer to
deal with any difficulties appropriately and smoothly
transition customer relationships with the assistance of
An employee's premature exit (such as abandoning their
employment), accompanied by key clients, is quite likely to
breach the duty of fidelity that is likely to require an
employee to ensure a smooth transition before leaving,
especially senior staff with an ability to materially
Best be discreet about leaving
Senior staff tempted to tell their direct reports, clients
and suppliers they're leaving before they tell their
employer? Exiting employees should consider keeping mum or at
least being more discreet about their plans to depart,
especially where they haven't told their boss yet.
The Court of Appeal has confirmed that an employee can be
disloyal by telling staff before their boss that they are
leaving and approaching various suppliers to see if they
would supply the employee's new business. Canvassing
suppliers and causing rumours to start circulating about what
might be going on at your employer's business can be seen as
undermining your employer's reputation and good will. It
could be made worse where an employee is a Manager with
access to confidential financial and marketing information
and a foreseeable risk exists that reporting staff may leave
It is one thing to plan to leave your employer and set up
a competing business if you proceed with discretion. It is
quite another, in my view, to do so in such a way that your
plans become widely know but without telling your employer,
and in a way which is potentially damaging to your
Breaching the duty of fidelity could result in an employer
justifiably taking disciplinary action against an employee.
If it's serious enough it could result in summary dismissal.
Leaving anyway? An employee should start worrying if they
have taken steps to undermine their employer before they have
left because any proven breaches could cripple that employee
Recently the Employment Court demonstrated its willingness to
award substantial damages (nearly $4.3 million) against
employees who were found to have breached their duty of
fidelity resulting in losses to their former
Among many steps taken by the three senior managers found to
have breached the duty of fidelity, were securing customers
and staff for their own company whilst employed and taking or
deleting key company information used to undercut quotations
made by their employer to gain work for their new business.
In an earlier decision the Employment Court stated that all
three managers owed an implied duty of fidelity and an
obligation to act in good faith that prevented them from
making approaches to clients or potential clients of their
employer on behalf of their new company before they stopped
working. This potentially included approaches to prospective
clients due to "... circumstances in which top management may
not profit from business opportunities that became known to
them while in previous employment."4
Senior employees ought to exercise additional caution when
aware of another employee's breach too:
If an manager or senior employee observes actions that are
harmful to the employer it is no great extension of the duty
of fidelity or trust and confidence to require that employee
to report that conduct to the employer (sic).5
Even without a written agreement telling staff and employers
to behave in good faith - you just gotta!
The substantial remedies available to employers who suffer
loss as a result of an employee beaching their duty of
fidelity should discourage employees (and especially senior
staff) who might undermine their existing employer to boost
their new venture by taking key clients, staff and/or
Even if an employee feels indignant about a lack of
recognition or paltry pay rates, these factors alone would
rarely, if ever justify failing to act in their employer's
best interests while at work. Like any relationship, the
parties to an employment relationship must rely on a mutual
trust and confidence.
An employee tempted to poach staff, steal customers or even
speak openly about their departure plans with suppliers,
should remind themselves of the consequences if caught - not
only might they lose their job, but they could face costly
claims for damages too.
References: 1: At 38, Morris v Interchem
Agencies Ltd  1 ERNZ 93. 2: At 518, Big Save Furniture
Ltd v Bridge  2 ERNZ 507 (CA). 3: Rooney
Earthmoving Ltd v McTague  NZEmpC 63. 4:
At 120, Rooney Earthmoving Ltd v McTague  ERNZ
Lucia Vincent is a Senior Solicitor based in the Dunedin
office of Janet Copeland Law, Employment Lawyers. For advice on
any aspect of the employment relationship, you can contact
Lucia at Lucia.Vincent@JCLaw.co.nz
or on 03 474 5826 or 021 223 4694.
We remind you that while this article provides commentary
on employment law topics, it should not be used as a
substitute for legal or professional advice for specific
situations. Please seek guidance from your employment lawyer
for any questions specific to your workplace.