Conflict of Interest - Restrictive Covenants

Can an employee be dismissed for starting another business?

An employee may be dismissed for starting a new business if the contract of employment with the existing employer specifically states that during the period employment, the employee will devote the whole of their time and attention to the business of the company and/or that they will not engage in any other activity which is likely to prejudice their ability to serve the company.

Conflict of interest

In A Restaurant Assistant Manager v A Restaurant (ADJ-00013091), the employee raised a complaint seeking adjudication by the Workplace Relations Commission under Section 8 of the Unfair Dismissals Act, 1977, after he was dismissed, apparently due to him exploring the option of opening a competing business.

His contract of employment stated:

“During the period of this contract, you will devote the whole of your time and attention to the business of the company and you undertake that during the period of this contract you will not engage in any other activity which is likely to prejudice your ability to serve the company, nor will you engage in any business activity which may cause a conflict of interest with the business of the company.”

He was working for an Indian restaurant and their was some evidence that he was exploring the option of setting-up his own, nearby.

Dismissal due to conflict of interest

Section 6(1) of the Unfair Dismissals Act 1977 provides that:

“Subject to the provisions of this section, the dismissal of an employee shall be deemed, for the purposes of this Act, to be an unfair dismissal, unless, having regard to all the circumstances, there were substantial grounds justifying the dismissal.”

The burden of proof rests with the respondent to establish the substantial grounds justifying the dismissal of the complainant in this case. The respondent said that the complainant was dismissed because he was in negotiations to open an Indian restaurant that would be in competition with his own business. He considered this to be a breach of trust and a contravention of the complainant’s contract of employment which required him to not to “…engage in any business activity which may cause a conflict of interest with the business of the company.”

The questions to be decided are: was it reasonable for the respondent to dismiss the complainant and was the process that ended with his dismissal a fair process?

Conflict of interest, competing business and the law

The issue of a conflict of interest and an employee’s desire to set up their own business is explored at chapter 16.89 of “Redmond on Dismissal Law” by Desmond Ryan, (Bloomsbury, 2017).

A number of precedents are cited where the Employment Appeals Tribunal (EAT) has concluded that even where a restrictive clause is included in an employee’s contract, seeking to prevent them from setting up in business similar to their employer, “an employee cannot be dismissed for nurturing this intention.”

The author refers to the Employment Appeals Tribunal case of McDermott v Kemek Limited / Irish Industrial Explosives Limited, [1996] ELR 233 where the “general principles” relating to employees in these circumstances were set out:

1. It is perfectly legitimate for an employee to aspire to set up in business on his own account.
2. Such a person would consider it normal to work in the industry with which he was familiar. It would be contrary to public policy to prevent someone from setting up in competition with his employer.
3. However, an employee’s duty of fidelity continues so long as he remains in employment. There may be a point at which preparations to set up a new business might be incompatible with continuing to serve the existing employer.
4. If an employer believes that an employee’s actions in pursuit of his ambition have so become incompatible, he owes the same duty not to dismiss unfairly as he would in any other type of case.

Decision

In this case, the Adjudication Officer found that the actions of the employee, in exploring the possibility of setting-up his own business, was not a breach of his contract of employment and so awarded the employee €3,168, equivalent to 12 weeks’ pay.

Further Information

For further information, please contact the author of this article, Barry Crushell.