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Planning To Leave Your Employment And Compete? Don't Forget About Your Duty Of Loyalty

When employees decide to leave their employer and engage in competition, they frequently overlook their duty of loyalty. Absent a non-compete or non-solicitation restriction, an employee may believe that he or she can freely engage in discussions with clients and customers regarding their intention to leave employment and engage in a competitive business.

During the employment relationship, employees are subject to a duty of loyalty to their employer. This duty requires that the individual act solely for the benefit of their employer on all matters connected to their employment. In general terms, this duty prevents employees from engaging in any act that is disloyal to their employer including conduct that may be deemed competitive with the employer’s business.

Most states, including Nebraska, allow an individual to take steps in preparation for competition prior to departing employment. However, litigation often ensues as to what conduct is deemed "preparatory activity" during the employment relationship and what competitive actions cross the line.

What conduct is generally acceptable?

The following acts are generally acceptable and are not deemed a violation of an individual's duty of loyalty while he or she is still employed:

  • Seeking other employment and negotiating employment terms with a competitor.
  • Forming a legal entity that will be engaged in competition with the employer.
  • Securing office space for the competitive business by purchasing or leasing property and purchasing equipment and supplies.
  • In preparation for competition, the individual can also open up a bank account and may be able to seek financial backing for the competitive business.
  • Absent an agreement to the contrary, there is no duty for the employee to provide advance notice of his or her intention to resign. In other words, the employee can leave upon a moment's notice and immediately compete for business.

What conduct will likely cross the line?

On the other hand, there are several things that cross the line and would likely be deemed a violation of the duty of loyalty if they occur while employed:

  • Contacting clients and customers and advising of the intention to leave employment to compete or soliciting business from any client, customer or prospect.
  • Discouraging or preventing the development of new business for an employer.
  • Appropriating or using an employer's confidential information or trade secrets for purposes of preparing for or engaging in competition. This legal obligation continues after the employment relationship ends.
  • Acquiring business or profiting from any transaction that would be considered a business opportunity belonging to the employer.
  • Soliciting other employees to join a competitive enterprise.
  • Disparaging or speaking negatively regarding the employer or the employer's products or services.
  • Performing services for a competitor of a new firm prior to terminating the employment relationship.
  • Using company time to prepare for competition.

Prior to resigning from employment, it is always a good idea to discuss the departure with counsel. First and foremost, you should request a legal review of any employment agreement, including offer letters and restrictive covenants that limit post-employment competition and other activities. Avoiding the missteps on the front-end can help avoid potential roadblocks down the road that may effectively stall your business plans.

The attorneys in our Labor and Employment Group can help you navigate this process.