Law blog: Being faithful to your employer

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.

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 relationships too?

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 they leave.

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 shortcomings.1

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 their employee.

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 influence clients.

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 too:

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 employer.2

Breaches costly

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 financially.

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 employer.3

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

Discouraging Disloyalty

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 information.

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.

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References: 1: At 38, Morris v Interchem Agencies Ltd [2003] 1 ERNZ 93. 2: At 518, Big Save Furniture Ltd v Bridge [1994] 2 ERNZ 507 (CA). 3: Rooney Earthmoving Ltd v McTague [2012] NZEmpC 63. 4: At 120, Rooney Earthmoving Ltd v McTague [2009] ERNZ 240.

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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.