Key Points:

Employers can stop their employees from competing against them in their own time through carefully drafted contractual restraints.

It's not uncommon for employees to seek work from two or more employers, which could be in the same industry and target the same consumer market. This can give rise to doubts (whether valid or not) that the employee may not be able to devote himself/herself to both employers with the utmost of good faith and fidelity.

In Adidem Pty Ltd T/A The Body Shop v Suckling [2014] FWCFB 3611, the Full Bench of the Fair Work Commission affirmed that it was unfair for The Body Shop to dismiss an employee engaged in out-of-hours work for a competitor, PartyLite Pty Ltd.

The decision is a reminder for employers that contracts of employment should be carefully drafted with proper legal advice. In this case, the relevant provision was held to preclude employment with a competitor, but not work for that competitor as an independent contractor – a fatal gap.

The decision also raises interesting questions about the circumstances in which an employee's general law obligations of good faith and fidelity will prevent the employee from working for a competitor.

The facts in Suckling

The Body Shop is a well-known producer of cosmetic and beauty products with a product range that includes a variety of candles and oils.

The Body Shop operates through three main business divisions: retail, online, and “The Body Shop at Home” (BSH).

The BSH business involves The Body Shop selling its products to independent contractors who on-sell the products. The independent contractors receive payment from The Body Shop for achieving sales and sponsorship targets. Typically, independent contractors solicit party-planners to secure an invitation to attend parties and functions where products can be demonstrated, marketed and sold to consumers.

Nicole Suckling was employed by The Body Shop in the role of Consultant Support Advisor Level 1 in the BSH division. Her role and responsibilities involved taking and making phone calls, including with independent contractors to record details of sales, exchange and refund activity.

While still employed by The Body Shop, Ms Suckling entered into an independent consulting agreement with PartyLite, which sells candles to independent consultants such as Ms Suckling, who then on-sell to consumers at parties and other functions.

The Body Shop considered this contravened her contractual obligations to it. The Body Shop pointed to her contract of employment, which said:

"It is considered an employee cannot be totally committed to The Body Shop if working for a competitor. Thus, whilst working for The Body Shop employees cannot simultaneously work for any other enterprise this Company considers a market place competitor; to do so is considered misconduct and may lead to termination of employment"

In subsequent correspondence with Ms Suckling's legal representatives, The Body Shop also referred to certain confidential information which Ms Suckling had to access in her role, including consultant payment information, consultant details and upcoming promotions and incentives. This, it contended, could be advantageous to a competitor such as PartyLite.

Following further correspondence between the parties in which Ms Suckling refused to resign from PartyLite despite being directed to do so, The Body Shop terminated Ms Suckling's employment effective 30 April 2013.

Ms Suckling brought an unfair dismissal application.

Under section 387 of the Fair Work Act 2009 (Cth) one factor to consider in assessing whether a dismissal is unfair is whether the employer had a valid reason for the dismissal.

At first instance, it was held that Ms Suckling's dismissal was unfair because there was no valid reason for termination. The Body Shop appealed.

Who was Ms Suckling working for?

In relation to breach of contract, the critical issue was whether Ms Suckling could be said to be "working for" PartyLite, as required by the terms of the contractual restraint.

Under Ms Suckling's services agreement with PartyLite, she was an independent consultant, not an employee. The agreement did not require Ms Suckling to sell PartyLite's products; it merely permitted her to buy them. Arrangements for when, how and for how much to sell PartyLite's products were all matters that lay within Ms Suckling's discretion. PartyLite received no direct return from Ms Suckling's sales.

The specialised nature of Ms Suckling's relationship with PartyLite meant that it could not be said that Ms Suckling worked for PartyLite. The agreement with PartyLite contemplated rather, that Ms Suckling would work in an independent capacity. The Full Bench ruled that this took Ms Suckling's engagement with PartyLite outside the ambit of the contractual restraint.

Similarly, the Full Bench found that any direction or order from The Body Shop to Ms Suckling to desist work for PartyLite, could not be considered a reasonable direction, because such direction was founded upon a misconception as to the scope of the contractual restraint.

Did she breach her implied obligations to her employer?

The BodyShop argued that Ms Suckling's engagement with PartyLite had compromised her duty of good faith and fidelity, which is implied into all employment contracts.

The Body Shop referred to Ms Suckling's access to confidential information. If this information was disclosed to or used by PartyLite or Ms Suckling in her capacity as PartyLite's independent consultant, The Body Shop's legitimate business interests would be harmed. That information included personal information pertaining to the consultants selling PartyLite products and contact details of party-hosts.

The Full Bench accepted that such information could, if passed on to a third party, threaten The Body Shop's commercial interests. However, the principles relating to the term of good faith and fidelity require that the alleged breach consist of actual misconduct, rather than speculation or apprehension on the employer's part – and there was simply no evidence of that.

Breach of fiduciary duty

The Full Bench's findings on good faith and fidelity raise a broader question as to the scope of that obligation.

Employers might be surprised to learn that ordinarily, there is no general law prohibition upon employees working in competition with their employer in their own time. However, this is not an absolute rule, and the extent to which employees are permitted to undertake competitive activities will depend upon the facts and circumstances – for example, if the employee is a fiduciary.

While there are certain established classes of fiduciary duty (eg. doctor-patient), the implication of a fiduciary duty in an employment context will depend upon the facts and circumstances, particularly the seniority of the employee, such as a director or senior officer.

It is doubtful that Ms Suckling's role as Consultant Support Advisor Level 1 at The Body Shop could be characterised as such a role.

Implications

The implications of Suckling's case should not be misunderstood or overstated. Employers can restrict employees from acting in conflict with the employer's interests – whether on their own behalf or on behalf of another – by relying upon appropriately drafted contractual restraints.

The case of Pedley v IPMS Pty Ltd [2013] FWC 4282 provides a marked contrast to this decision. Mr Pedley, a senior interior designer, was dismissed after sending an email to various persons, including clients of IPMS, promoting his private business.

There were many parallels between the facts in Pedley and Suckling. As in Suckling, Mr Pedley sought to promote a competing business during the term of his employment with IPMS. As in Suckling, Mr Pedley acted in an independent capacity (in his case as owner and director of a privately run business), rather than as an employee for a competitor.

However, the critical point of difference lay in the drafting of Mr Pedley's restraint clause. Mr Pedley's employment agreement precluded him from "being associated" with any business or entity that could result in the business or entity competing with IPMS. Mr Pedley's conduct provided a valid reason for termination, as it was in breach of the express terms of his employment agreement.

The lesson from Suckling's case is clear: employers can prevent an out-of-hours competitive engagements by their employees but they must take care in drafting the contractual restraint.

Sadaat Cheema