Employees Sued For Competing With Their Employer

Two Tauranga employees have been ordered to pay $232,500 for being secretly involved in a business that was in direct competition with their employer. 

The Employment Relations Authority held that the employees deliberately underbid their employers' tender price to secure work for their own benefit.  The conduct of the employees was described as "deceptive, dishonest and underhanded".

The employees held senior management positions with a company that provided industrial cleaning services to customers throughout New Zealand and the Pacific rim (the Company).  It also provided graffiti management and protection services.  As senior employees, they had unrestricted access to the Company's client pricing and future tender details. 

The employment agreements recorded that the employees were responsible for growing the Company's sales and enhancing its operations, and also to pursue and win new business opportunities.  In addition to the explicit terms of both employment agreements, the common law implies a duty of fidelity, good faith and honesty to the employment relationship.  That common law duty co-exists with the statutory duty of good faith by virtue of section 4 of the Employment Relations Act 2000.

From 6 April 2005, while they were also employees of the Company, the employees became directors of another company.  They were also involved with two other related companies.  Their involvement with these three companies was not known by, or disclosed to their employer. 

In January 2006, the employees (as directors of their own Company) successfully bid for graffiti protection work on State Highway 20.  The Authority found that they had deliberately underbid their employer's tender price to secure the project for their own company.  There were two further successful bids by them for work on two additional projects.  The Authority found that for both of these other projects they "could have and should have" secured the business for their employer. 

The Employment Relations Authority found that the employees breached their duty of fidelity, good faith and honesty owed to the employer.  The Authority found the breaches to be blatant and deliberate.  It was satisfied that the employer had suffered loss occasioned by the employees' various breaches and that it was right and proper that the Company be compensated.  It accepted absolutely that if the employees had carried out their duties faithfully as they were contractually bound to do, they would have secured the three business contracts for their employer.  It was on that basis that the Authority awarded the Company damages of $232,500 including a penalty of $5,000 each in respect of the breach of their statutory duty of good faith.

This case serves as a reminder that an employee can be held accountable for breaching employment obligations owed to their employer and, in particular, the basic duty of fidelity.  It is also a reminder that all employment agreements, particularly those for senior management employees, should include clear provisions dealing with protection of the employer's information, conflicts of interest and non-competition.  Including these clauses in an employment agreement gives the employer a framework to bring an employee who breaches these fundamental obligations to account.

For more information, please contact:

Erin Davies
Partner
t: +64 9 979 2177
m: +94 29 622 2300
e: Erin Davies

Last updated: 1 June 2008