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18 July 2012

Employee Setting up in Competition

The Employment Appeal Tribunal (EAT) has recently considered whether it was fair to dismiss two employees for taking preliminary steps towards setting up in competition with their employer.

Following hot on the heels from the decision of the Court of Appeal in Ranson v Customer Systems plc, in which an employee who set up in business with his employer was held not to be in breach of his contract of employment, the EAT has considered the dismissal of two employees who had taken preliminary steps towards setting up in competition with their employer.

The two employees in this case, K and H, had put together a detailed business plan for the purpose of seeking investment in their own company, which would be competing with their employer’s business of operating residential care homes for children.

Both employees were suspended and then dismissed for gross misconduct following separate disciplinary hearings.  The misconduct was described as a breach of the “fundamental trust and confidence” essential to the employment relationship.  The employer relied in particular on the fact that K and H had used company resources, including information on costings, in the preparation of their business plan.

The employees’ claims for unfair dismissal were rejected by the employment tribunal, which concluded that dismissal was within the range of reasonable responses open to the employer, following a reasonable investigation.

The EAT upheld the employees’ appeal and remitted the case to be reheard by the tribunal.  The EAT was not satisfied that the information used by the claimants in the preparation of their business plan could necessarily be categorised as ‘confidential information’, the unauthorised use of which would amount to a fundamental breach of contract.  The tribunal had not fully considered the question of whether the employees were acting in breach of their contract of employment by using company information in the preparation of their business plan.

Comment

The EAT in this case has provided a useful reminder that whilst employers have a considerable freedom to define what they will treat as gross misconduct, it is not in itself gross misconduct for an employee to make preparations for conducting a future business after his employment with his current employer has terminated.  It is likewise not necessarily the case that every piece of information the employer has, and that the employee may be aware of, can properly be regarded as ‘confidential information’ within the strict legal meaning of the term.

Employers should exercise caution before terminating an employee’s employment in this situation.  It would be prudent for employers to make sure that employment contracts and policies make the employee’s duty of confidentiality, and the consequences of breaching that duty, very clear.

A copy of the EAT judgment is available here