What Do Contractors Need to Know About Employee Duty of Loyalty and Ability to Compete
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We have seen a trend in the construction industry toward contractors requiring their employees to sign non-compete agreements. It has become fairly common practice. But what if your employees are not restricted by signed non-compete agreements? Do you have any rights to stop them from competing or taking your customers or other employees? The answer is “some, but limited” and those rights are explained below.
Duty of Loyalty
Employees owe their employee a “duty of loyalty.” The general rule with regard to an employee’s duty of loyalty to his employer is that an employee does not violate his duty of loyalty when he merely organizes a corporation during his employment to carry on a rival business after the expiration of his employment. Fish v. Adams, 401 So. 2d 843 (Fla. 5th DCA 1981). However, that employee may not engage in disloyal acts in anticipation of his future competition, such as using confidential information acquired during the course of his employment or soliciting customers and other employees prior to the end of his employment. Id. An employee does not have to be managerial in order to have this duty. Id.
On the other hand, the duty of loyalty does not prevent an ex-employee from competing against a former employer (absent a noncompetition agreement to the contrary). Harllee v. Professional Service Industries, Inc., 619 So. 2d 298 (Fla. 3d DCA 1992). And “an employee does not violate his duty of loyalty when he merely organizes a corporation during his employment to carry on a rival business after the expiration of his employment.” Fish, 401 So.2d at 845. Additionally, an employee may take with him a customer list that he himself has developed. Id.
In sum, a contractor’s employee cannot (i) while still employed by the contractor, compete for the same customers, (ii) while still employed by the contractor, try to convince contractor’s employees to quit their employment with contractor, or (iii) use contractor’s confidential information after employee leaves his or her employment with contractor. However, the employee can take steps to open up his or her new construction business while still employed, and can immediately start competing after employment terminates, including solicitation of contractor’s customers and employees, so long as ex-employee is not using contractor’s confidential information, or tortiously interfering with contractor’s relationships, as explained below.
Tortious Interference with Business Relationship
While an ex-employee may be free to compete against a former employer (assuming no non-compete agreement), the ex-employee may not tortiously interfere with contractor’s customers or employees in such competition. The elements of tortious interference with a business relationship are:
(1) The existence of a business relationship, not necessarily evidenced by an enforceable contract;
(2) knowledge of the relationship on the part of the ex-employee;
(3) an intentional and unjustified interference with the relationship by the ex-employee; and
(4) damage to the former employer as a result of the breach of the relationship.
Harllee v. Professional Service Industries, Inc., 619 So. 2d 298 (Fla. 3d DCA 1992).
Just like with the duty of loyalty, mere preparation to open a competing business does not constitute tortious interference. Id. Also, opening a bank account and obtaining office space and telephone service are acts of mere preparation and do not constitute intentional interference with a business relationship (or breach of duty of loyalty). Id.
Further, an ex-employee is allowed to use knowledge and relationships gained while employed (again, assuming no non-compete agreement). For instance, an ex-employee is free to solicit contractor’s customers if ex-employee had a long-standing relationship with the customers. See Mittenzwei v. Indus. Waste Serv., Inc., 618 So. 2d 328, 330 (Fla. 3d DCA 1993). An ex-employee does not tortiously interfere so long as ex-employee did not rely on any customer list compiled by former employer, but rather utilized the relationships ex-employee developed over the years. A former employee “cannot be precluded from utilizing contacts and expertise gained during her former employment, or even customer lists she herself develops.” Although, it is well settled that a former employee may not use for her own advantage customer lists obtained in confidence or containing trade secrets of the contractor. Id.
Proving that former employer’s customer list is confidential or trade secrets can be quite a challenge for contractors. Courts generally declare to be trade secrets employer customer lists which were compiled at great time and expense. In those cases, evidence substantiated the companies’ extensive efforts to obtain or solicit names and information about clients from various sources. In contrast, courts have found that a list of the company’s clients was not entitled to protection in the absence of evidence that “they are the product of any great expense or effort, that they are distillations of larger lists, or that they include information not available from public sources.” Id.
Tortious interference requires evidence that the ex-employee enticed former employer’s customers to break their contracts, or employees to leave their employment, through unfair competition or practices. “Competition for business by a competitor is not an actionable interference, even if intentional.” In the absence of a noncompetition clause, ex-employee is free to contact anyone with whom she had established a relationship while employed by former employer. Id.
Contractors should consider using non-competition agreements with their employees. In making that decision, contractors should evaluate whether the duty of loyalty or tortious interference law are sufficient to protect the contractor from harm, should an employee decide to leave and open up his or her own shop to compete against contractor.