Employment Matters

Employee pinged $50k for flagrant disloyalty
Brandon Brown uses a recent ERA case to highlight how disloyal employees can breach their employment agreement by competing with their employer before they even leave their employ.  

In the last issue of NZBusiness (October 2013) we wrote about restraint of trade agreements and how they can protect your business. As a follow on, this article discusses how disloyal employees can breach their employment agreements by competing with their employer before they even leave their employ.  
In the recent Employment Relations Authority (ERA) case Zeald NZ Ltd v Bernard, Mr Bernard was found to have breached his employment agreement at least 263 times, with actions including:
• Copying and removing the employer, Zeald’s, intellectual property and confidential information for his own use.
• Soliciting three of Zeald’s employees to leave their employment.
• Soliciting business from 51 of Zeald’s customers (ten while he was still employed).
• Working for a competitor of Zeald whilst still employed and during the period of his restraint of trade.
Bernard was employed by Zeald as a website results specialist and had in-depth interaction with customers in planning their websites. His employment agreement included confidentiality and restraint of trade clauses that applied after his employment ended.
During the last three days of his employment, while on annual leave, he started working for a competitor company. He also took 50 business cards of Zeald’s customers, along with a flash drive containing confidential information including the website planning and online strategy documents of 100 of Zeald’s customers. Bernard used Zeald’s website planning template to help the competitor prepare templates. He even emailed the company while still working at Zeald, suggesting how Zeald’s processes could be used for their advantage. Bernard also admitted to the private investigator that he had a vendetta against Zeald.
To compound the sense of injury to the employer, Zeald had endeavoured to treat Bernard well during the course of his employment, by giving him a 20 percent unsolicited pay rise and told him it was an encouragement to him regarding his long term future with the company.   
The ERA considered that Bernard’s breaches were serious, flagrant, deliberate and ongoing, and that a significant penalty was necessary to punish him and deter other employees from that type of conduct.
Bernard was ordered to pay Zeald damages of $6,778.17 for the cost of the private investigator, plus damages of $937 for the income Bernard received from the competing work and penalties of $50,000.  

Recovering damages and penalties
The substantial penalties awarded in favour of the employer make this case exceptional. Under the Employment Relations Act 2000, penalties of up to $10,000 can be awarded against an individual for a breach of the employment agreement. Penalties can be awarded on a per breach basis, or on a global overall basis as was done in this case.
To stop the competing activities concerned, early injunctive relief is often sought. However, whether the ERA will actually award monetary remedies and the quantum of that relief can be uncertain. A major challenge for employers is that damages will only be awarded for loss proven to be caused by the breach. Zeald only claimed $937 in damages from money Bernard received through doing work for third parties.
However, the Zeald case demonstrates that in appropriate cases, the ERA will consider awarding substantial penalties, in addition to the compensation available which directly arises from the breach of contract.   

Written and implied terms of an employment agreement
The Zeald case highlights the enforceability of implied terms of employment such as the duty of fidelity that will apply regardless of whether they are written into an employment agreement. The duty of fidelity is multifaceted but generally requires that an employee not engage in conduct that is likely to damage an employer’s business or which significantly undermines the relationship of trust and confidence.
This case reminds us that agreements should include confidentiality, intellectual property, and restraint of trade clauses to expressly protect their business interests, post-termination.
Despite the Zeald case, employers should be cautious in factoring in penalties in deciding whether to bring a claim against a former employee.  
The ERA and Court can award penalties to the Crown or to the employer, and there is no guarantee the penalty will be payable to the employer.  
Seek specific legal advice at two crucial stages: before presenting an employment agreement to a prospective employee, to carefully draft the necessary terms; and when you have reason to suspect an employee has breached their agreement.    
Swift action may be required to stop the competing activities and then to recover damages and possibly penalties for the employee’s actions.  

Brandon Brown is a solicitor at EMALegal, the Employers and Manufacturers Association www.ema.co.nz