Who really owns your business?

YOU DO, RIGHT? After all, it’s you who started it and grew it. And it’s you who pays the rent and the staff. The customers are customers of the business, aren’t they? Sure, your employees have the direct relationship with the customers, but the customers belong to the business…don’t they?
It comes as a surprise to many business owners that for employees without an employment contract which contains a properly constructed “restraint of trade”, the law will offer little, if any, protection in a situation where an employee leaves and takes “your” clients with them.
Often we see thriving businesses crippled when a key employee (or employees) leaves employment and sets up shop down the road or round the corner. Perhaps they join your competitor or go into business by themselves.
In businesses in the service industry, sometimes the only “product” being sold is the personal service your employee provides your customer. It is perhaps understandable then that a customer might want
to follow wherever your (ex) employee goes. Even in businesses which make and sell something more tangible, customers might wish to continue to buy the product from their favourite sales person, if that’s what they have always done.
Unless you have in place employment contracts which contain properly drafted restraints on former employees approaching customers, or accepting work from them, post-termination of employment, there may be little you can do to challenge the position.
A court won’t enforce a restraint for longer than is “reasonable” and a valid restraint of trade that lasts for over 3-6 months is very rare. However, even a prohibition on a former employee not contacting clients for a few months may give you sufficient time to make sure customers stick with you going forward (through special offers, introductions to your new star employee, etc).
We therefore strongly recommend you review your existing employment contracts to check whether they contain a valid restraint of trade. If you are looking to purchase a new business you should always ensure that any employees you are taking over have a restraint in their new contract with you.
Otherwise, when two key staff leave to start their own business, the business you paid a vast sum for – was really owned by someone else.

By Warwick Ryan,
Partner, SWAAB


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