Intention to Compete is not Gross Misconduct

An employment tribunal had been wrong to find dismissals fair where employees were dismissed for planning to set up in competition and using company resources to do so.   

In Khan v Ladsker Child Care Ltd, K and H were managers of care homes.  They had put together a detailed business plan to set up a competing business with a view to seeking investors.  When the business plan came to their employer’s attention they were dismissed for gross misconduct, on the basis that by planning to set up a business in competition and using company resources to do so they had breached the implied term of trust and confidence.   The company resources they were alleged to have used were company information in the form for costings and personnel and care policies.

The tribunal found the dismissals fair but the EAT upheld the employees’ appeal. The tribunal had failed to consider whether the fact that the employees were planning to set up in competition was capable in law of amounting to gross misconduct – based on previous case law an employee who intends to leave to set up in competition commits no breach of contract unless there are enforceable covenants in his contract or he misuses confidential information of his employer.  In addition, the tribunal had failed to consider exactly what resources had been used and whether they were capable of amounting to confidential information of the employer.

The case was remitted to the employment tribunal to consider whether the employees had misused confidential information so as to entitle the employer to dismiss for gross misconduct, or whether the information used had simply been part of their skill and knowledge gained during their employment which they were entitled to use going forward. 

This case serves as a reminder that employees are entitled to take preparatory steps to set up in competition and that doing so does not amount to gross misconduct entitling an employer to dismiss.  Dismissals will, however, be capable of being fair if the employee also breaches obligations of confidentiality by misusing their employer’s confidential information for their own purposes.