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Fighting back when an employee is unfaithful to your business

20 November 2015

Faithfulness in Employment

The courts have long recognised the duty of fidelity in employment relationships.  In NZ, the good faith duty has been codified in the Employment Relations Act 2000.  Section 4 requires employees and employers to have an active and constructive relationship where they are, among other things, responsive and communicative.  In addition, employees and employers should not do anything (directly or indirectly) that misleads or deceives (or is likely to mislead or deceive) each other.  This duty applies regardless of whether or not it is set out specifically in an employment agreement.

So, being faithful in employment means employees should act in their employer’s best interest.  Employees shouldn’t use their employer’s time, resources or opportunities to compete with their employer. Provided there is no competing with the employer while employed, it is possible for an employee to take preparatory steps for a new business outside of working hours, but care should be exercised and advice sought in this area.

Recent case of E-Lighting Ltd1

In this case the employer was a small lighting company distributing three products.  It had two sales representatives, Ms Dickens and Mr Peter (‘the employees’).  The employees told the employer they intended to start a new company but before the employer saw their written resignations, the employees had told several other employees they had resigned.  They also visited the premises of a key supplier, Hunza Production Limited, who at the time accounted for half of the employer’s revenue.  Eleven days later that Hunza terminated its supply agreement with the employer.  After the employees left, it became apparent that Ms Dickens had been taking orders and selling products via her own company, whilst employed by E-lighting.

Despite having employment agreements with restraint of trade provisions, the employer was unable to pursue the employees on this basis because neither employee had signed their employment agreement. The employer therefore sued the employees for breach of their duty of good faith as the conduct took place while they were still employed by E-lighting.  (There was also a successful claim against Hunza for aiding and abetting the employees to breach their good faith duty).

The Authority found that the employees took advantage of E-lighting by making business preparations for their new company while they were still employed with E-lighting.  They had also obtained specific confidential information for the purpose of competing with the employer.  The Authority also found that Ms Dickens had leveraged her relationship with her employer’s customers for her own benefit.  In short, they had not been faithful to their employer.  Ms Dickens was ordered to pay E-lighting $10,000, Mr Peters $3,000, and Hunza $10,000.  The hearing on damages is awaited.

Employee’s infidelity can be devastating on businesses.  It is worth knowing that even if an employment agreement is defective, employers are still able to take action against employees who have breached their duty of good faith during their employment.

This article is intended to provide a general guide on this topic.  Legal advice should be sought about your specific circumstances.

1 E-lighting Limited v Dickens & Ors [2015] NZERA Akl 300.

 

Carolyn Gardner is a Senior Solicitor in the Employment team at Norris Ward McKinnon. Contact Carolyn at carolyn.gardner@nwm.co.nz

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