Chris Hadrill of Redmans Solicitors answers today’s employment law question

The answer to this question (and any question which involves setting up in competition with your employer) will depend upon an examination of the employees’:

  • contracts of employment with their employer
  • restrictive covenants that apply upon termination of the contract of employment
  • other statutory or fiduciary obligations i.e. if they’re a director
We’ll therefore examine this matter by addressing the following issues:
  1. Why is being a director important?
  2. What are fiduciary duties and what do they entail?
  3. Why is my contract of employment important?
  4. What can I do if there are restrictive covenants in my contract of employment?

Why is being a director important?

Directors have a great deal of power in their companies – they make important decisions that affect the health of the company and have access to confidential and potentially valuable information (such as client lists, the company’s strategy, new potential markets etc.). They therefore also have reciprocal duties which restrain their powers and attempt to encourage them to act in a manner which is conducive to the owners of the company – the shareholders.

What are directors’ duties and what do they entail?

Under the Companies Act 2006 directors have a number of statutory duties towards the companies that they act for. These duties include:

  1. The duty to act within their powers
  2. To promote the best interests of the company
  3. To exercise independent judgment
  4. To exercise reasonable care, skill and diligence
  5. To avoid conflicts of interest
  6. Not to accept benefits from third parties
  7. To declare an interest in a proposed transaction or arrangement

The most important ones (regarding this post) are number 2 (the duty to promote the best interests of the company) and number 5 (to avoid conflicts of interest). If a director is planning to set up a company in competition whilst he is employed by the company then it is likely he is in breach of his duties under the Companies Act 2006.

Why is my contract of employment important?

Your contract of employment is also important in these circumstances. As well as being subjected to directors’ duties (if you are indeed a director) you also have express and implied duties under your contract of employment (again, if you have one). Executive directors normally have a contract of employment with their company. For example, there will normally be an express duty of confidentiality in your contract of employment but there will also be an implied duty of fidelity (loyalty) in the contract. This will restrain your actions whilst you’re an employee of the company – these effectively bind you to act (as far as is reasonable) in your company’s best interests. This doesn’t mean that you can’t plan a new business venture that may compete with your employer but it does mean that you will be in breach of both your contract of employment and your statutory duties under the Companies Act 2006 if you do.

Further, your contract of employment may also contain restrictive covenants which attempt to restrain your actions after you leave your employment. Restrictive covenants are prima facie void and unenforceable as they are in restraint of trade but should the restrictive covenant be legitimately attempting to protect a proprietary interest and reasonable in its nature, duration and geographical scope then they will be valid and enforceable. You should therefore check your contract of employment or annexed documents to see what your responsibilities are in this regard.

What can I do if there are restrictive covenants in my contract of employment?

If there are restrictive covenants in your contract of employment then you should attempt to obtain legal advice from an employment lawyer as to what the nature, duration and geographical scope of such covenants are. Once you have an idea of what you are restrained from doing under your contract of employment then you should attempt to act within this. If you breach these covenants and your employer later finds out you have done so you may find yourself slapped with an injunction and/or pursued for damages.

About Chris Hadrill

Chris is a specialist employment lawyer at Redmans Solicitors, a law firm based in London. He writes on employment law on a variety of websites, including Direct 2 Lawyers, Lawontheweb.co.uk, LegalVoice, the Justice Gap, the Redmans blog, and his own blog.

Contact Chris by emailing him at chadrill@redmans.co.uk

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