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Matters of loyalty in Employment
For many of us, our job is a significant component of our life. More than simply being a means of earning an income, a job may give us esteem and even a reason for being.
Against that background, it is sometimes easy to forget that, if we are an employee, we ultimately perform our work for the benefit of someone else. The now-outdated terminology used to describe the employment relationship - that of Master and servant - made this distinction more clear. As employees, we are essentially servants to our Master's bidding.
One of the consequences of this aspect of the employment relationship is that the employer retains ownership of things which inherently belong to it. Amongst other things, an employer may have, by its own efforts or reputation, developed a profile within a particular industry - and a client base to accompany it. Those things remain the employer's property - even though an individual employee may feel some personal attachment to them.
Difficult issues can arise where an individual worker leaves his or her job and attempts to take some of the employer's business with him or her. An example of the issues that can arise in this situation may be found in a decision of the Employment Court in Interchem Agencies Limited v Morris & Anor (Unreported, Employment Court, Auckland, 16 August 2002).
Mr Morris had been employed by Interchem for about seven years, most latterly as a sales manager. An aspect of Interchem's business involved the supply of chemicals to the dairy industry. Amongst other things, Mr Morris' job involved him in acting as an intermediary between a major American supplier of polypropylene film and a significant New Zealand customer.
In September 1998 Mr Morris announced that he was resigning from Interchem, and indicated that he intended to establish his own company which might compete with his former employer. Although there was dispute as to the precise circumstances, Mr Morris succeeded in obtaining ongoing business from the American company.
Each party raised issues with the other concerning the circumstances of Mr Morris' resignation.
For his part, Mr Morris argued that he had been treated unfairly by his employer following notice of his resignation. Mr Morris essentially maintained that he had resigned from his position at Interchem without necessarily intending to take business of the American company with him - but that an independent approach had been made to him after the American company had learned that he was setting up his own business. Mr Morris took issue with the way in which he had been treated both at the time of, and following, his resignation.
In contrast, Interchem claimed that Mr Morris had acted in breach of the loyalty which he owed to it by advancing his own business. Interchem maintained that Mr Morris had obtained ongoing business from the American company prior to his resignation and that, in essence, he had obtained business belonging to Interchem contrary to that company's interests - and for his own personal benefit.
The Court was asked to consider a significant amount of competing evidence. Ultimately, it resolved questions of credibility in favour of Interchem - and (amongst other things) found that Mr Morris had acted contrary to his former employer's interests in the way in which he had arranged dealings with the American company.
The Court held that its finding of fact led to the conclusion that Mr Morris had breached the duty of loyalty which he owed to Interchem. The Court also found that Mr Morris had failed to report to his former employer information which was material to its business - namely, concerns that the American company said it had about Interchem (which led to its ongoing business being offered to Mr Morris). In summary, the Court found that Mr Morris had acted to obtain the American company's business to the exclusion of his employer.
This was a decision with significant financial consequences. The Court awarded Interchem damages of $400,000 for breach of contract - being the amount assessed as the loss suffered by the company as a result of the removal of the American company's business.
This case dramatically illustrates the importance of the duty of loyalty and fidelity in employment relationships.
Even where an employee may, by his or her own efforts regard an aspect of the employer's business as his or her own, primary ownership remains with the employer. An employee may not act to defeat the employer's interest by seeking to take business away for his or her own benefit. To do so is to act in breach of the obligation of loyalty - and may result in an order requiring the employee to pay compensation.
