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Can I set up a business while still employed?


A reader in the Financial Times asked: "I have worked for a large firm of architects since 2002 and enjoy my job. However, I really want a fresh challenge and am thinking of setting up by myself.

But with a family and a mortgage I can’t just hand in my notice with nothing to turn to.

Where do I stand legally if I start writing a business plan and begin working with designers on things like a logo and stationery so that I can hit the ground running when I leave? I am not talking about taking clients with me or doing any of this during work hours. But obviously I would be using the knowledge I have gained into how things work, rates, and so on, to develop my own new business proposition.

Sarah Tahamtani, employment partner at Clarion, says:

Setting up a business can be both exciting and stressful, and trying to get a head start is a natural inclination.

Your first step should be to review your employment contract. These tend to be geared towards protecting the interests of employers and as such I suspect that yours will contain one or more restrictive covenants. These normally go much further than simply preventing employees from soliciting their employer’s clients.

Some restrictions prevent employees from working elsewhere or from going freelance while they are still employed – regardless of whether the work on the side is done outside your employer’s working hours. In your case, such a restriction could cause a problem.

Your contract is also likely to include confidentiality obligations designed to prevent staff from revealing trade secrets, know-how and other valuable business insights, both during their employment and after they leave. However, this does not prevent you from using your general industry knowledge of how to do the job.

If your contract does contain confidentiality restrictions, you should take care not to let “secret” information slip when speaking to potential designers, contractors and clients.

Another typical restriction that might appear in your contract is one that prevents you from poaching colleagues to join your business. Restrictions such as this can be surprisingly wide, and they don’t always simply cover your colleagues but could also include suppliers, contractors and clients.

If you do intend to approach designers or other third parties who are currently working for your employer then you will need to bear this in mind and, again, check your employment contract.

Provided nothing in your contract prevents you from starting up your business, you should still make sure that your new logo and branding does not look, sound, smell or feel the same as your employer’s. Using any of their intellectual property for the benefit of your new business could land you in a lot of trouble.

If you do decide to go it alone, I would strongly recommend that you seek advice from an experienced employment law professional to ensure your old job is concluded properly and that your new business gets off to the best possible start. Good luck!

Daniel Barnett, an employment law barrister with Outer Temple Chambers, says:

You are probably going to be safe doing this. Unless you are a director (in which case special rules apply about competing), employees are allowed to take preliminary steps on the road to competition with their current employers without being in breach of their employment contracts.

Indeed, the founders of your current firm would – presumably – have done exactly the same thing.

But there are several things you must not do. You must not do any work on your proposed new business during your working hours. You must not solicit colleagues at work, or clients or suppliers, while you remain an employee. You must not actually trade while you remain an employee.

But preparing a business plan, arranging a lease of premises, negotiating finance, having letterheads printed etc all fall on the “legitimate” side of the line. Once you start contacting prospective clients, advertising, or supplying services, you cross the line and would be in breach of your employment contract with your old firm if you remain employed by them.

In such circumstances, they would be entitled to seek an injunction against you forcing you to delay the launch of your business, and would also be able to claim any loss of profits they suffer from you.

After you have resigned, you are free to contact ex-clients (and solicit ex-colleagues) if two conditions are met. First, you must not breach any post-termination restrictive covenants in your contract. These can be complicated, so it’s worth seeking legal advice.

Second, you must not specifically memorise (or copy) confidential information such as client lists, price lists and so on. If they have become part of your personal knowledge bank, that’s fine – but you must not remove confidential information or deliberately memorise such information.

Bear in mind that they will probably hold you to your notice period, and possibly put you on garden leave. Your obligations during a garden leave period are the same as if you were working in their office: you cannot actually compete while you remain an employee.

Source: Financial Times, September 2012

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