Hefty penalty for workers who breached non-compete clause

In a recent case, the Equity Division of the Supreme Court of New South Wales considered the consequences for two employees who established a competing business while still working for their employer. Ultimately, this carried a hefty penalty for the workers, who breached several of their employment obligations.

Between 2013 and 2017, Yang Qi and Zhengyu Tong were employed by the Property Investors Alliance Pty Ltd (“PIA”), a real estate agent and property developer. Each employee was responsible for approximately 400 investment properties managed by PIA. Their duties included dealing with enquiries, undertaking property inspections, showing properties to prospective clients and managing rent payments by tenants.

In March 2016, without the knowledge or consent of their employer, Qi and Tong established a competing business, Rental Master. As part of their new business, Qi and Tong transferred 44 properties from PIA to Rental Master. In addition, Rental Master independently retained a further 60 properties.

Judgment

Qi and Tong’s employment contract expressly provided that, during their employment with the company, they would not engage in any other employment without PIA’s consent or be involved in any other competing businesses. Qi and Tong also accepted that their employment carried fiduciary duties – to act in good faith and refrain from putting themselves in a position of conflict with their obligations towards PIA.

Qi and Tong accepted that, in transferring the management of 44 clients from PIA to Rental Master, they were in breach of their employment obligations. However, they contended they were not in breach of their duties regarding the other 60 properties, the owners of which were not clients of PIA. 

Conversely, PIA submitted that, by retaining those 60 clients to Rental Master, Qi and Tong took “advantage of [an] opportunity or knowledge derived from [their] fiduciary position.” It alleged Qi and Tong were liable to compensate PIA for the profit Rental Master made from those clients.

The Court agreed with the company, finding that Qi and Tong were not entitled to retain those 60 clients for themselves without first seeking their employer’s informed consent. In a second costs hearing, the Court made a judgment for PIA against Qi and Tong for $382,493.

Key Takeaways

• Employees owe a fiduciary duty to act in good faith and fidelity
• Non-compete clauses prevent a current or former employee from engaging with competing businesses during employment and for some period after employment ceases

An employee who breaches their contractual or statutory obligations towards their employer may be liable for severe penalties