Fidelity and Trust, Employee's Duty Of—Frustration of Contract
Fidelity and Trust, Employee's Duty Of
(Confidential information, etc)
§ When a job applicant accepts an offer of employment, he (or she) does so on the tacit understanding that he will be diligent and efficient in the performance of his duties, will behave responsibly and safely, and do nothing to damage his employer's property, goodwill or business interests. If he later proves to be unpunctual, dilatory, inept, perverse or unruly, he knows full well (or should do) that he is putting his job 'on the line' and will be dismissed if he does not mend his ways. If he deliberately or carelessly discloses information about his employer's business methods, trade secrets, chemical formulae, pricing policy, customer lists, marketing strategy, and the like, he not only risks losing his job but could also be restrained by the courts (as could any third party to whom he has relayed sensitive information) and may be ordered to compensate his employer for the damage he has done.
§ The employee who is wilfully wasteful of company property, or who directs potential customers to cheaper and more reliable products elsewhere, or who claims longer hours than he actually works, or who rings-up an incorrect amount on a cash register (and pockets the difference), or who accepts a bribe from a client in return for special treatment, is also in breach of his implied duty of fidelity and honesty and is liable to be dismissed without notice.
§ However, the common law right of an employer to dismiss the indiscreet or dishonest employee is nowadays modified by the statutory right of an employee not to be unfairly dismissed (Part X, Employment Rights Act 1996). An employee has the right to be given an opportunity to explain his (or her) conduct and to be represented at any disciplinary hearing by a shop steward or colleague of his own choosing. This procedure is particularly relevant when dishonesty or fraud is alleged to have taken place. Unless the employer undertakes a complete investigation of all the circumstances, his decision to dismiss such an employee may be challenged by an employment tribunal, although he need only satisfy the tribunal that he had reasonable grounds for believing that the employee had indeed committed the offence in question.
§ A case in point is that of Trust House Forte Ltd v D J Murphy [1977] IRLR 187, when the night porter in a hotel was unable to explain a £10.07 deficiency from the proceeds of liquor sales to guests. After a thorough investigation, he was summarily dismissed. The Employment Appeal Tribunal held that, so long as an employer in such a case had investigated the circumstances fully, and had reasonable grounds for suspecting the employee of theft, he was fully entitled to dismiss him without warning. In a similar case, that of British Home Stores Limited v Burchell [1978] IRLR 379, the Employment Appeal Tribunal held that 'where an employee is dismissed because the employer suspects or believes that he or she has committed an act of misconduct, in determining whether that dismissal is fair, an employment tribunal has to decide whether the employer entertained a reasonable suspicion amounting to a belief in the guilt of the employee'. It is not, said the EAT, the role of an employment tribunal to establish the employee's guilt or innocence. What is important is whether the employer acted 'reasonably' (Harris (Ipswich) Limited v Harrison [1978] IRLR 382).
The employee's duty of confidentiality
§ Every employee has a common law (and, hence, an implied contractual) duty not to divulge or misuse confidential information acquired by, or given to, him in the course of his employment. If his duties are such that he is unlikely to come across any information that he could possibly use, or misuse, to his advantage, his employer may not consider it important enough to remind him that he 'must not talk to strangers'. If, on the other hand, he occupies a responsible position or does a job in which he is routinely or even occasionally exposed to sensitive or confidential information, it would be tempting fate for an employer not to insert a clause in his contract of employment pointing out (or reminding the employee), in terms perhaps similar to the following, that he must not, during his employment by the company, or thereafter:
'misuse, communicate or divulge to any person (except to those officials of the Company whose province it is to know the same), any confidential information relating to the business affairs, processes or trade secrets of the Company or of any associated employer'.
Such a clause in an employment contract should at least prompt the employee to think twice before doing anything (or embarking on any project) likely to do harm to his or her (former) employer's business interests.
| Note | As was pointed out by the Court of Session in Dalgleish & Others v Lothian & Borders Police Board [1991] IRLR 422, employers also have a duty to preserve the confidentiality of personal or related information conveyed to them by their employees. For example, an employer should not give out an employee's address or telephone number to a third party without the express permission of the employee concerned. Nor should an employer lose sight of his duties under the Data Protection Act 1998 in relation to information about employees that he holds on computer. Such data must not be used or disclosed in any manner incompatible with the purpose for which it is held. |
§ In Faccenda Chicken Limited v Fowler & Others [1986] IRLR 69, Lord Justice Neill observed that the courts will intervene speedily to enforce an employee's implied duty of confidentiality so long as he remains in the employment of his employer. But, he added, the courts will be decidedly more cautious when responding to a motion for an injunction restraining his activities after his employment has ended. 'It is clear,' he said, 'that (an employee's) obligation not to use or disclose information may cover secret processes or manufacture, such as chemical formulae, designs or special methods of construction, and other information that is of a sufficiently high degree of confidentiality as to amount to a trade secret. The obligation does not extend, however, to cover all information that is given to or acquired by the employee while in his employment and, in particular, may not cover information that is only "confidential" in the sense that an unauthorised disclosure of such information to a third party while the employment subsisted would be a clear breach of the duty of good faith.'
§ Similar sentiments were expressed by Mr Justice Cross in Printers & Finishers Ltd v Holloway [1965] RPC 239. 'One must bear in mind,' he said, 'that not all information which is given to a servant in confidence, and which it would be a breach of duty for him to disclose to another person during his employment, is a trade secret which he can be prevented from using to his own advantage after the employment is over, even though he has entered into no express covenant with regard to the matter in hand.'
The nature of 'confidential' information
§ In my view, said Neill LJ in the Faccenda case (qv), there are three categories of information (some or all of it labelled as 'confidential' but not the subject of any relevant express agreement) which an employee can acquire in the course of his employment. These are:
a. Information of a trivial nature, readily accessible from public sources, which would not be regarded by reasonable persons, or indeed by the courts, as being remotely confidential. An employee is quite at liberty to disclose that information to any person either during his employment or afterwards.
b. Information that an employee must treat as confidential, either because he has been told it is confidential or because it is obviously so. Once an employee absorbs this information, it becomes part of his acquired skill and knowledge that he is expected to put to effective use in the performance of his duties. So long as he remains in the same employment, he must not misuse or divulge that information to any unauthorised person or company. If he does so, he is in breach of his duty of confidentiality. But, once he has left his employer's service, the law allows him to use his full skill and knowledge, either by competing directly with his former employer or by accepting a position with a rival employer, even though the latter involves disclosure and not mere personal use of that information. If an employer wants to protect information of this kind, he can do so by an express term in the employee's contract restraining him from competing with him (within reasonable limits of time and space) after the termination of his employment.
c. Specific trade secrets, chemical formulae, manufacturing processes, special methods of construction, and the like, that are so confidential that an employee cannot lawfully use or divulge them (before or after the termination of his employment) even though he may have committed that information to memory.
The implications are clear. Reliance on an employee's implied duty of confidentiality is fine, so long as that employee remains in his (or her) employer's service. But, if the employer wishes to ensure a continuation of that duty, after the employee has left his employment, he would be well-advised to insert an express term to that effect in the employee's contract – preferably when his employment begins – or, at the very least, require him to sign a document (or covenant) restraining him from misusing or divulging confidential information during his employment and for a reasonable period afterwards. But, as Lord Justice Neill remarked in the Faccenda case, a restrictive covenant (or express term) will not be upheld unless the information that it seeks to protect can properly be regarded as a trade secret or the equivalent of a trade secret or, as Lord Waddington made clear in Herbert Morris Ltd v Saxelby [1916] 1 AC 688, unless the protection sought is reasonably necessary to protect a trade secret or to prevent some personal influence over customers being abused in order to entice them away.
Status of restrictive covenants
§ As a rule, any clause in a contract of employment (or similar document signed or accepted by an employee), that purports to restrict an employee's activities after his or her employment has ended, is in restraint of trade at common law and prima facie void. And, as was indicated earlier, such a clause will only be upheld by the courts if considered reasonable and not contrary to the public interest (Nordenfelt v Maxim Nordenfelt Guns & Ammunition Co Ltd [1894] AC 535; [1893] 1 Ch 630. A restrictive covenant must be for a specified period and cover a specified geographical area and it must, for the most part, be designed to protect the employer's legitimate interests. If a covenant is couched in vague terms or 'casts too wide a net' it will almost certainly be declared invalid and unenforceable. Given that it is up to an employer to justify a restrictive covenant, he would be well-advised to seek legal advice to ensure that it is properly drafted.
Wrongful or 'constructive' dismissal
§ In Rex Stewart Jeffries Parker Ginsberg Ltd v Parker [1988] IRLR 483, the Court of Appeal held that an employer cannot enforce a restrictive covenant in the contract of employment of an employee who has been wrongfully dismissed. In other words, an employer cannot benefit from his own wrongdoing. The same rule applies, said the House of Lords in General Bill Posting v Atkinson [1909] AC 118, when an employee resigns, when he has every right to do so because of his employer's repudiatory conduct (nowadays referred to as a 'constructive' dismissal).
§ An employer does not have the automatic right to search the persons or property of his employees without their consent. Any such right must have been conceded by the individual at the time he (or she) started work with his employer and should be incorporated as an express term in his contract of employment, eg by inclusion in the written statement of terms of employment, in a staff handbook, a disciplinary code, or whatever. Nor can an employee be forced to submit to a search of his or her person or belongings. If he refuses, he could be held to be in breach of contract and, therefore, liable to dismissal. Alternatively, his employer may exercise reasonable force to detain the employee pending the arrival of the police, provided he has reasonable cause for suspecting that the employee is in possession of stolen property.
| Note | For obvious reasons, a search of an employee's person, clothing or belongings (including the search of a locker or desk) must always be carried out in the presence of a witness. In appropriate cases, the employee should also be invited to be present. It goes without saying, that a body search should only be carried out by a person (and in the presence of persons) of the same sex. A forced body search constitutes an unlawful trespass (or, in certain cases, an assault) and is best left to a police officer. |
'Moonlighting' by employees
§ An employer does not have a great deal of control over the spare-time activities of his employees. Indeed, few employees would accept a term in their contracts that forbids them doing part-time work outside their normal working hours. However, as has been suggested elsewhere in this handbook, the tribunals have long since acknowledged the right of an employer to manage his business to the best of his abilities. The employee who comes to work in the mornings tired and worn-out, after working through the night for another employer, will be unable to devote his (or her) full attention and energies to his 'regular' job. Given the nature of his work, he might well pose a safety risk to himself and other employees. Indeed, after due warning, he could be fairly dismissed – either on grounds of misconduct (eg, falling asleep at his desk, or being rude to clients), incompetence (eg, making inexcusable mistakes and errors of judgement) or safety, hygiene or security.
§ An express term in a contract of employment, forbidding spare time employment – either in the interests of health, safety and efficiency, or to prevent employees 'moonlighting' with a specific rival employer – is more likely to impress a tribunal or court than a 'catch-all' and unexplained blanket prohibition on all forms of spare time work. If an otherwise satisfactory employee is peremptorily dismissed on discovery that he (or she) has been pulling pints for three or four hours every evening at the local pub, a tribunal is almost certain to challenge the reasonableness of a rule that imposes a seemingly arbitrary prohibition on all spare time work. If there is nothing to show that the employee's extracurricular activities adversely affected his capabilities as an employee, the dismissal may well be held to have been unfair.
§ In some situations, an employer may be prompted to apply to the courts for an injunction restraining a rival employer from employing his employees during their spare time. However, the employer would need to show that his own business would suffer as a consequence of his employees' out-of-hours activities with the rival employer.
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