Setting Up In Competition With Your Employer Can Be A Criminal Offence

It is not a widely known by employees and employers alike that competing with your employer can be a criminal offence under the Fraud Act 2006.

Competing with your employer may involve setting up or planning to set up in a competing business whilst still employed and or the diverting of business opportunities from your employer to others.

I was recently instructed on a case where a client had set up a competing business to that of his employer which was operating whilst they were still an employee. As well as being summarily dismissed for breach of contract and pursued for breach of contract, damages and an account of profits, they ended up having their collar felt and the prospect of a criminal charge of fraud by abuse of position.

In the past, my experience has been that when such matters have been reported to the police, they have shown very little interest and advised these are civil matters but it appears there has been a change recently in the police’s approach.

What is Fraud by Abuse of Position?

Under section 4 of the Fraud Act 2006 an offence occurs if a person:

• occupies a position in which he was expected to safeguard, or not to act against, the financial interests of another person
• abused that position
• dishonestly
• intending by that abuse to make a gain/cause a loss.

What does ‘abuse of position’ mean?

Briefly, this means a position of trust and one which carries more than a moral obligation and includes company directors, trustees, business partners or employees.

It is not a requirement that the person is successful in their attempt to abuse their position, or whether they make a gain or a loss is made by the party they owe the duty to. The offence is complete once the act is carried out.

What types of conduct would constitute this offence?

The following are examples in an employment context which would amount to an offence under the Fraud Act 2006:

• an employee of a software company who uses his position to clone software products with the intention of selling the products on his own behalf;
• an employee who fails to take up the chance of a crucial contract in order that an associate or rival company can take it up instead;
• a director of a company who dishonestly makes use of knowledge gained as a director to make a personal gain;
• an employee who abuses his position in order to grant contracts or discounts to friends, relatives and associates.

It is easy to see from the criteria detailed above for the offence of fraud by abuse of position, how this offence is relevant to employees who have setting up in competition during the course of their employment.

The civil claims and remedies available to an employer in this situation and these have been summarised briefly below:

Any employee who sets up in business or competing business whilst still an employee is exposing themselves to being dismissed for gross misconduct and to further civil claims by their employer including:

• Breach of Contract;
• Breach of mutual trust and confidence;
• Breach of duty of good faith;
• Breach of fiduciary duty (duty to act in best interests of business that employs them)

The remedies available to an employer for such actions are injunction to enforce restrictive covenants/prevent the employee making use of wrongdoing and a claim for loss and damages.

Where the employee owes a fiduciary duty to the employer (i.e. in the role of director/senior management) the remedies available are far wider and the employee is obliged to account for all profits as a result of the breach of duty.

Opinion

Whether or not you wish to report such matters to the police will largely depend on what you wish to achieve. Clearly, a criminal investigation and potential conviction are very serious matters, which must be considered really carefully and have the potential to cause very serious difficulties and disruption to those concerned.

You should also bear in mind that once the matter is reported to the police you will lose control of the matter, the police will take over all the evidence and the matter will move at the pace the police dictate. There is the possibility that the police could decide at any stage to drop the case as the burden of proof in criminal cases is a higher standard and whilst a criminal investigation is ongoing you any civil action against the employees is likely to be stayed pending the outcome of the criminal investigation.

If it is your main aim to obtain financial reparations and to prevent any future loss or damage to your business this may be best served and achieved by pursuing civil claims for injunction, damages and an account of profits rather than reporting the matter to the police, which could slow down and hinder your ability to take such actions.

If you have any questions in connection with these matters or wish to have a discussion with us about any similar issues you are experiencing please contact us on 01785 223440