Leaving your job and setting a competing business in direct competition to your previous employer is one of the most high-risk areas for any entrepreneur.
Those who get it wrong can find themselves hit by legal action which can be a disastrous prospect for any new business.
I want to cut ties with my employer and set up a rival business. Can my employer stop me doing this?
Before you do anything, check your employment contract. These could have explicit and implied obligations that apply both during and after your relationship with your previous employer. In most cases, provided that you are not a director, LLP member or partner with fiduciary duties you can generally take “preparatory steps” towards setting up a competitor business without being in breach of your obligations.
However, this will be dependent on what your obligations are stated to be. Be mindful too that they may not be found solely in your employment contract. They may be in a variety of places, including service agreements, shareholders’ agreements, membership or partnership agreements and long-term incentive plans, bonus, or other remuneration schemes.
>See also: How can a restrictive covenant be enforced?
I worked on a great idea for my employer but never saw it through – can I roll it out when I open my own business?
This is an area you need to be very careful in. Generally, any inventions, works, designs, databases or names you have come up with during the course of working for a business and which is relevant to it cannot be used to set up a competing business, without prior authorisation, otherwise you are infringing your employer’s IP rights.
Remember too that if you have worked for a competing business, you are likely to have access to some of its confidential information until you return business property, hard and soft copies of documents, memory sticks and devices, and permanently delete documents on personal devices or email at the end of your employment. This is an important area to be mindful of because if you use this information in breach of your contract and this causes damage or might cause damage to the business you are exiting, it is likely that enforcement action will be commenced against you or your new business.
Okay I am happy my contract allows me to do this and I have taken steps on IP. How quickly can I get going?
You may be eager to get started. But when you can actually set up a new business is dependent on any notice period and/or gardening leave. These are usually set out in your contract of employment, and if your employer gives you notice it must be at least the minimum statutory notice period of one week per full year of service up to a maximum of 12 weeks.
Employers often have discretion within your employment contract to place you on garden leave, so that you remain away from the office and do not contact colleagues or customers, aside from when instructed to do so, but your other contractual obligations will continue to apply in full.
Garden leave is generally easier for employers to enforce than restrictive covenants and so is a useful tool for your employer to use to protect against the competitive threat you might pose.
While you may think garden leave is a useful time to develop your new competing business, you are still restricted by the terms of your contract and your employer will be monitoring your activities carefully to ensure you do not breach those obligations. If there is no contractual right to place you on garden leave, you may be able to argue that there has been a breach of contract and so the terms of your contract no longer bind you, but it is recommended you seek legal advice from an experienced employment solicitor first if you are hoping to run that argument.
Whilst you are still employed and bound by the terms of your contract of employment, you are only able to make acceptable preparatory steps so as not to depart from your obligations. As long as there are no express obligations preventing you from doing so, you can purchase an off-the-shelf company, arrange business premises, meet investors and other potential business contacts, take professional advice and prepare a business plan, as long as these things are done outside of your working hours whilst you are still employed and not using your current employer’s resources or contacts.
What if I am ‘taking’ others with me?
If two or more people leave a business at the same time to join another competing business, this is a team move. A team move might breach an explicit post-termination restriction in your employment contract prohibiting moving and working with another individual you worked with at your former employer. If this destabilises the workforce, particularly if you and/or the other individuals are influential within the business, this might be an enforceable restriction.
It may also constitute a breach of an implied obligation in your contract of employment if you have been discussing moving elsewhere with a current colleague, whilst you both still work for an employer, so that you can both move on to compete with that employer. Considering your own position and future prospects is likely to be seen as more reasonable than recruiting one or more colleagues to organise a competitive business whilst working for the same employer or shortly after having worked together.
Calum Covell is senior marketing manager for Harper James Solicitors, the law firm for entrepreneurs