How not to quit and set up in opposition
Senior corporates can heed lessons from staff at a civil contracting company, on how not to quit and set up in opposition.
Three former employees of Rooney Earthmoving – a division of Rooney Group – were ordered by the Employment Court to pay more than $4 million to the company after the court found they took steps to set up in competition while still employed.
Judge Barry Travis found Kelvin McTague, Clarence Whiting and Kerry Bartlett acted in concert in early 2004 to establish BMW Contracting (BMW) in direct competition with Rooney Earthmoving (Rooney)
In doing so they breached duties owed to the Ashburton-based company Rooney Earthmoving, whilst still employed by it.
Their wrong steps included soliciting staff and taking confidential information
The damages award is the largest sum ever ordered against employees by the Employment Court.
Simpson Grierson associate Rebecca Rendle says the court's findings demonstrate there can be serious financial consequences for staff who set up a rival business and breach duties of contract before their employment ceases.
(Read more about what employers can do to protect themselves from similar behaviour below.)
What the Employment Court found
Mr McTague, considered the main contractual offender, abandoned his employment with Rooney first while the other two remained, soliciting clients from whom Rooney might have expected to obtain work to provide work for BMW or stockpiling work opportunities – rather than arranging for it to be done by Rooney.
Judge Travis found Rooney’s significant drop in turnover over those months was consistent with the solicitation of clients and delayed work until after BMW was up and running.
Rooney successfully proved the three men individually and collectively breached their employment agreements.
The breaches included:
- Soliciting employees of Rooney to join BMW while still employed by Rooney
- Clearing a whiteboard of confidential information relating to ongoing contracts
- Removing a quotations folder
- Obtaining the company’s client list
- Using quotations unlawfully obtained to undercut Rooney for the benefit of BMW
- Judge Travis found that each of the men, by the steps they took in breach of their individual employment agreements to solicit staff and clients of Rooney, were able to set up BMW and ensure it traded profitably from the outset, at the expense of Rooney.
In its first month of trading, BMW generated profits of about $200,000.
Without this head start obtained as a result of the employees’ breaches, the Court was not satisfied that BMW would have been in a position to be a substantial competitor of Rooney Earthmoving during its first three years of operation.
Judge Travis found the men liable for the whole of the loss to Rooney and ordered them to pay damages of $429,000.
He found Messrs McTague and Bartlett contributed equally to the breaches and apportioned 40% of Rooney’s proven losses to each of them, and the balance of 20% to Mr Whiting.
Lessons for employers: Tailor your employment contracts
Simpson Grierson associate Rebecca Rendle says Rooney case provides an important reminder for senior employees that there are consequences for breaching duties of employment.
“Because if the employer can prove they suffered loss as a result of the breach, they can claim that back,” she says.
And employers need to be aware of steps they can take to protect their business from unfair competition.
Standard aggreements won’t do. Ms Rendle recommends employment agreements for senior staff are tailored specifically for the company.
Express clauses, such as restraint of trade provisions, non-solicitation clauses and garden leave provision will help to make it very clear what an employee’s obligations are.
And for the employer it will help mitigate the risk of a staff member taking client lists, or copying information they have access to.
In the Rooney case, the breaches occurred before the employees had given notice – and that’s where the employer is most vulnerable, she says.
Employers have to be particularly vigilant to protect confidential information in the electronic age, where documents don’t need to be removed from the office physically.
Many law firms no longer allow staff to use personal memory sticks on work computers. If data needs to be taken home electronically, IT staff will oversee the process.
Tailoring employment contract clauses to suit individual job descriptions is important: “Because they are only enforceable to the extent they are reasonable,” says Ms Rendle.