It is expected that in 2027 a ban on non-compete clauses in employment contracts will be introduced. While the scope of the ban remains unknown it is expected to apply to all employees who fall below the high income threshold (currently $183,100, but expected to increase on 1 July this year).

There are a significant number of senior employees with access to broad business information that will be captured by this ban. Accordingly, employers need to think carefully about how to protect their organisation from these departing employees in the absence of a contractual restraint.

Some of the options available to employers were highlighted in a case before the NSW Supreme Court (“Court”) involving an employee who had no contractual restraint but was still ordered to pay damages to his former employer for breaching his duties when setting up a competing business.

Background

The employer ran a business that sold rubber and pool products. The employee had been employed in the business since 2006 and held the position of Sales and Marketing Manager. In this position the employee had broad access to information and systems, including customer lists and the employer’s product catalogue. The employee did not have a written contract and there was no contractual restraint.

In the years before the employee resigned, the employee:

• registered a trading name and website address using the employer’s name;
• engaged website developers to create a new website for the employer (without the knowledge of the employer and which the employee paid for himself);
• created a new version of the product catalogue outside of working hours; and
• downloaded a 50-page customer list and later took steps to conceal it (by saving it as “Mum’s Meatloaf Recipe”).

After the business was sold to new owners in 2017 the employee resigned and started a competing business. When asked to return all confidential information the employee responded that he did not have any information to return. In the new business the employee created a catalogue which was substantially similar to that of his previous employer and also launched a website that was based on the work he had done while still an employee of his previous employer.

The issues

As the employee did not have a contractual restraint the employer had to rely on other breaches in its claim against the employee. These breaches were:

• a breach of the equitable duty of confidence (which related to the confidential information in the customer list); and
• a breach of the fiduciary duty of fidelity and loyalty.

The Court found that the employee had beached the duty of confidence as the employee had misused the customer list noting that the employee had taken it secretly, not disclosed it when requested and took steps to conceal it. While the employee could contact clients after he left (as he had no contractual restraint) he took the list with the intention of assisting him.

The Court also found that the employee had breached his fiduciary duty by misusing his position in relation to the catalogue creation, website preparation and taking the customer list. These actions “springboarded” the employee into his new business. The Court stated:

“By engaging in this conduct, he placed his personal interest in conflict with his fiduciary duties of fidelity and good faith to his employer…”

The employer was awarded $50,000 in equitable compensation for the loss suffered.

Takeaways for employers

Employers need to know that there are still boundaries as to what an employee can do in terms of competing, or preparing to compete, during and after their employment. This is true even when there is no contractual restraint, as there are still options available to employers. Employers should consider these options in light of their strategic objectives, particularly where holding an employee to account sets a standard for future employee behaviour.

Employers should also be focused on the practical steps that can be taken to protect an organisation such as file encryption, automatic alerts when certain documents are accessed, downloaded or printed, robust exit interviews and conducting a digital sweep of any company devices returned on termination of employment.

You can read more about the alternatives to restraint clauses in our article here.