Conflicts of interest in employment law

I often come across the issue whether an employee has a relevant conflict of interest which is a legitimate point of interest for an employer. I routinely deal with this as an issue for both employers and employees. This propensity arises from the natural instinct of some employers to overstate the employer’s rights to interfere in the private lives of employees as against the equally common but equally wrong view of  employees who often believe that what they do in their own time is their business.

The true legal position in Australia is that there is a fundamental legal duty ( technically an equitable fiduciary duty) of good faith which is owed by an employee to an employer and a corresponding legal right which employers have to issue lawful and reasonable instructions to employees about the employment relationship. Where does this begin and end though?

The law was only re-stated last week in Berger v United Crib Block Construction Pty Ltd  [2017] FWC 450 delivered 16 March 2017 per Bull DP as follows

“A conflict of interest (pecuniary or otherwise) arises where an employee’s non-work related activities may unduly influence decisions and conflict with the proper performance of an employee’s duties, or are simply incompatible with the impartial fulfilment their duties.

In Blyth Chemicals Ltd v Bushnell 1933 49 CLR 66 Dixon and McTeirnan JJ’s stated that:

“Conduct which in respect of important matters is incompatible with the fulfilment of an employee’s duty, or involves an opposition, or conflict between his interest and his duty to his employer, or impedes the faithful performance of his obligations, or is destructive of the necessary confidence between employer and employee, is a ground of dismissal … [b]ut the conduct of the employee must itself involve the incompatibility, conflict, or impediment, or be destructive of confidence. An actual repugnance between his acts and his relationship must be found. It is not enough that ground for uneasiness as to its future conduct arises … the burden of proving a justification is upon the appellant; it is for it to obtain the necessary findings to establish misconduct”.

Their Honours also drew attention to the danger of drawing adverse inferences where the conduct in question was capable of an innocent construction.  .

There is an obligation on all employees to avoid conflicts of interest between their personal interests and those of their employer. In Digital Pulse v Harris Pty Limited 2003 NSWCA 23  in an aspect of his judgment, Palmer J summarised the general law principles applicable to the duty of an employee to his or her employer in the following way:

“20 An employee has a duty to act in the interests of the employer with good faith and fidelity. That duty is implied in every contract of employment if it is not otherwise imposed by an express term. In addition, the duty is imposed upon every employee by the law of fiduciaries, the relationship of employer and employee being recognised as a paradigmatic fiduciary relationship.

21 The obligations imposed by the duty are not coterminous with the employee’s normal working hours: they govern all the activities of the employee, whenever undertaken, which are within the sphere of the employer’s business operations and which could materially affect the employer’s business interests. Whether a particular activity could materially affect the employer’s business interests is a question of fact and degree.

22 The duty of loyalty requires that an employee not place himself or herself in a position in which the employee’s own interest in a transaction within the sphere of the employer’s business operations conflicts with the employee’s duty to act solely in the employer’s interest in relation to that transaction. A fortiori, an employee may not take for himself or herself an opportunity within the sphere of the employee’s business operations without the employer’s fully informed consent.”

In Consolidated Paper Industries Pty Ltd v Matthews 2004 WASCA 161, Newnes M provided a summary of the fiduciary duties an employee owes to their employer in cases of an employee establishing their own business:

“[60] An employee during the period of his employment must act in the employer’s best interest and not in pursuit of his own interests: Wessex Dairies Ltd v Smith [1935] 2 KB 80; Faccenda Chicken Ltd v Fowler & Ors [1986] 1 All ER 617. Except in special circumstances, however, there is no general restriction on an ex-employee canvassing or doing business with customers of his former employer: Faccenda at 625, Wessex Dairies at 89. But during the term of his employment an employee must not solicit customers for a future time when the employment has ceased and the employee has established his own business: Wessex Dairies Ltd v Smith (above), Independent Corporate Services Ltd v Stevens [2002] WASC 280. An employee is not, however, prohibited during his employment from making preparations for setting up a business when the employment ends. What steps by the employee will be permissible will depend upon the circumstances, but such activities may extend to the issue of circulars, finding business premises and hiring employees: Robb v Green [1895] 2 QB 1; Independent Management Resources Pty Ltd v Brown [1987] VR. 605. But the duty of loyalty of an employee will be breached if the employee engages in unfair or wrongful acts detrimental to the employer’s business, such as deferring fulfilment of orders in anticipation of filling them himself, or developing the capacity to copy his employer’s products with a view to appropriating for himself his employer’s market, or recruiting the employer’s staff for the new business, or taking copies of or memorising customer lists or other confidential information of the employer, or engaging in significant work to set up the business in his employer’s time: Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41; McPherson’s Ltd v Tate (1993) 35 AILR 225; Blythe Chemicals Ltd v Bushnell (1933) 49 CLR 66; WA Fork Truck Distributors Pty Ltd v Jones & Ors [2003] WASC 102.”