“I want to leave my current job and set up a competing business. What problems might I have?”
This post examines the objectives of employee who want to leave their current employer and set up a new business in the context of UK employment law and contract law. It mainly focuses on how employees can get into trouble and what steps they should take.
The employee’s objectives:
- Set up and run competing business
- Avoid being sued
If you want to leave your current job and set up a competing business there are a number of contractual and employment law issues which may involve you in litigation in the future. Therefore the first thing to do is check your contract of employment – what are the express terms of your contract? Particularly, are there any restrictive covenants which prohibit you from engaging in certain actions for a limited period of time after your contract of employment terminates? Common restrictive covenants are:
- Non-compete clauses
- Garden leave clauses
- Non-solicitation clauses
Restrictive covenants are prima facie void as they are in restraint of trade. However, the courts recognise that employers have a right to protect their commercial interests when their employees leave, especially if the employees have been party to especially sensitive information or have been exposed to particular clients. An employer can therefore utilise common commercial law restrictive covenants if it can show that:
- It has a legitimate proprietary interest that it is appropriate to protect; and
- The protection sought is no more than is reasonable having regard to the interest of the parties and the public interest
Non-compete clauses seek to prevent employees from engaging in a particular trade or offering particular services that would compete with their former employer after the termination of their contract. It is generally deemed unreasonable for a non-compete clause to last for longer than 12 months post-termination. The non-compete clause may limit the prohibition of competition to a specific geographic area, such as the City of London. The less restrictive the non-compete clause, the more reasonable it will be likely to be (as is the case with all restrictive covenants) in commercial law terms.
Garden leave clauses seek to prevent employees from resuming employment immediately but forces the employee to serve out their notice period away from the office. This serves two potential purposes – it protects the commercial interests of the employer and it prevents a competitor from engaging the employee and using the information that the employee has. This serves to protect the employer’s information and its goodwill with its clients.
Non-solicitation clauses seek to prevent an employee from “soliciting” the clients of their former employer after they have left employment. Employees are therefore generally prevented from contacting clients that they had business dealings with at their previous employer in the (normally) 24 months prior to the termination of the contract of employment. The length of the non-solicitation period is normally up to 12 months but sometimes as little as 3 months.
As well as being subject to any express restrictive covenants in (or annexed to) the contract of employment, employees also have a number of implied duties towards their employer, such as the duty to maintain confidentiality relating to trade secrets. How the line is drawn between what is a trade secret and what has is normal commercial information can sometimes be difficult to draw but employees should be wary as to what information they divulge to any person after they leave employment – the watchword is always “less said soonest mended”.
Should you receive a letter from your previous employer asserting that you are in breach of contract (because, for example, you’re competing with your employer) you should seek specialist legal advice. It’s better to be prepared than risk being caught out when it comes to litigation. However, there is a big difference between receiving a pre-claim letter and actually having proceedings issued against you – in a lot of cases the matter never gets as far as litigation but is either settled or the employer loses interest in enforcing the contract.