Peer-to-Peer: What are my legal obligations when setting up a company to compete with my employer?

Written by ProfitGuide Staff


“I have been considering starting an Internet-based consulting business very similar to what I am doing now for my current employer. What legal implications are there with starting your own business that is based on what you are being paid to do for another company as an employee?”

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Reader responses

Christoph Faig, President, aclaro softworks, inc.:

You haven’t mentioned what’s contained in your employment agreement. It may specifically prevent you from competing with your current company (in which case it will probably detail a territory, period, and scope of business which define competition), and may also assign rights to any intellectual property you’ve produced (which could include this idea) to your employer.

If either of these are the case, then your employer may have legal grounds to pursue, if they so desire. Remember that you can’t be prevented by such an agreement from earning a living in your field, which may help you out, particularly if your employer’s scope of business is very broad.

If there is nothing in writing between you and your company, then you are most likely free to pursue your idea without too much fear.

In either case, I would consult a lawyer for an opinion. I was able to get a previous employer to sign an agreement which explicitly allowed me to compete with a portion of their business, which allowed me to move ahead without worrying about potential conflicts with them.

Sheila Grower:

My answer is a question… Did you sign an agreement stating that you would not do what you are thinking of doing? When I worked for a publishing firm, one of my conditions of employment was to sign an agreement that after I left their employment, I would stay out of publishing for 5 years. What I don’t know, is whether the law would be on your side or your current employer’s, should you go ahead with your plan. If I had wanted to stay in publishing, I would have consulted a lawyer.

David Petrie:

Hello. While a detailed answer would have to come from a lawyer, there are a few issues of which I am aware, that John will need to consider.

First, what is the employer’s policy towards employees having businesses on the side? If they have a policy against this (and some do), and John goes ahead anyway, he would be in breach of his employment contract.

Second, he would need to consider whether he has signed any non-disclosure or non-compete agreements when he was hired. A non-compete agreement would expressly bar him from starting a business. Non-disclosure is greyer, but, if the company could make a case that he discloses, either explicitly or implicitly, any of its proprietary information, he would be in violation of the agreement and his employment contract with them, and subject to penalties as spelled out in the agreement.

Related to the competition issue, is whether John would be approaching customers or potential customers of his employer. If he sets himself up in competition to them, while remaining on their payroll, he would probably be open at least to dismissal — most employers don’t want to be in this kind of situation.

There is also an issue of ownership of John’s work. Some employers have, in their contracts, that they retain ownership to anything the employee develops on their time, or relating to their business. Thus, John could create some very thorny issues for himself, his employer and his customers.

John also needs to be absolutely clear that it would be inappropriate for him to use his employer’s resources in the pursuit of his own business. To do so would be unethical (at least), and may also breach his employment contract.

Similarly, he must be careful not to take his employer’s time to pursue his own business. When he began working there, he assumed the obligation to devote his entire working day (as defined in his contract) to his employer’s aims and tasks. If he works on his own projects without their consent, he would be open to dismissal.

In this context, the ‘contract’ he has with his employer need not be written. The law holds that evidence of an agreement is sufficient proof of the agreement. In other words, if he works there, receives pay, performs specified duties, avoids certain activities, follows policy, etc., he has a contract with his employer which has all the force and effect of an explicit, written one, even if it is only verbal and implicitly understood. Thus, it would pay him to understand, in detail, what his agreement with his employer is before he goes much farther.

If his activity appears to be against the contract, he must choose between his job and his business. However, if he has a good relationship with his employer, and they are fairly broadminded, they may be willing to have him, as a contractor, continue to work with them.

If, on the other hand, his relationship is not good, or the employer is closed-minded on this topic, John should consider very seriously whether he wants to undertake this project.

And, as I mentioned, he should consult a lawyer. Most lawyers in Canada will offer about half an hour of their time for free (in the interest of generating further business), so he should go in with all the details — the nature of his work and contract with his employer, whether he would be in direct competition with them, the kind of work he intends to do, etc. — to get the best value for his time. The law society in his home province can refer him to a suitable lawyer near his location. He can usually find the lawyer referral service in the yellow pages under “Lawyers”.

Best of luck, John.

Mike Salveta, Managing Director, HROI — Human Capital Solutions, Mississauga, Ont.:

The answer to this is very complicated but there are several general principles which apply:

If the employee has signed a non-compete clause, where the terms of competition are clear and reasonable, then the employee could be prevented from competing for a limited period of time, in limited areas. Assuming there are no restraints against competing, the employee may compete. The employee has a right to use information in their head, but have a fiduciary responsibility to their past employer to not take or use customer lists, confidential information, processes, pricing policies etc. The employee should resign prior to the establishment of the competitive business. Damages have been awarded to past employers where it has been established that the business was planned while in the employment of the past employer.

Some examples of this may include:

  • Registration of the business while employed with past firm
  • Letters or other contact / solicitation of business while employed with past firm
  • Discussions with co-workers; use of company property to design marketing materials for new business
  • Applications of new business loan against income of past employer.

In general, in situations where the employee has not been restricted to compete, the employee may compete with past employers, however the ex-employee would be wise to compete in a fair and ethical manner, which includes the period of employment with their current employer.

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Originally appeared on PROFITguide.com