Principals risk being put ‘over a barrel’ by ex-employees
Financial planning principals should include restrictions on using client lists outside the practice in employment contracts, a lawyer has warned.
You give somebody a desk when they work for you, but you don’t expect them to take it when they leave,” Perth-based lawyer Brett Davies said.
“So why should a planner take the client list with them when they leave?” Davies said he was not advocating that planners not change jobs or be restricted in where they work.
“Restraint of trade is unreasonable when a planner leaves and won’t stand up in law,” he said. “But the law does recognise an up-to-date employment contract that clarifies what property belongs to the practice.”
Davies said restrictions on an employee damaging their employer’s trade were enshrined in English law more than 200 years ago by Lord Kenyon. Kenyon said in a 1799 case: “A servant, while engaged in the service of his master, has no right to do any act which may injure his trade or undermine his business, but everyone has a right, if he can, to better his situation in the world.”
Davies said this allows a planner to set up a business in competition with a previous employer, but not with information that belongs to the employer.
The solution to the problem is to restrict the use of information, such as client lists, business operations and ways of dealing with suppliers, in an employment contract.
“You should identify how confidential information, such as client lists, are protected from misuse in the planner’s employment contract, then protect the modus operandi of the practice, such as Coca-Cola protecting the formula of its drink.”
Davies said ways of dealing with suppliers covered such areas as providing planning services to a superannuation fund.
“It is the way the practice deals with that supplier of clients, as the leaving planner could contact the trustees and ask them to recommend their services instead,” he said.
“An employment contract is the only line of defence.”
Unfortunately, it is hard to get established employees to sign a new employment contract with such restrictions included in the document, Davies said.
“You have to get employees to sign an employment contract detailing these points on day one of their employment,” he said.
“Any later and the employee has the principal over a barrel.”
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