Employee Setting Up a Competing Business?

Finding out that an employee may be setting up a competing business can put a founder or manager in a difficult spot very quickly. The first mistake many businesses make is assuming they can dismiss the employee immediately without checking the contract or facts. The second is doing nothing until clients, staff or confidential information have already moved across. The third is relying on vague wording in an employment contract and discovering too late that the restrictions are too broad to enforce.

If you suspect an employee is building a side business that competes with yours, the right response depends on timing, evidence and the terms you already have in place. You need to know what counts as competition while employment is ongoing, what duties the employee already owes even without a special clause, and when post-termination restrictions such as non-compete, non-solicitation and confidentiality terms may help. This guide explains what employee setting up a competing business means for UK businesses, what legal issues to check before you sign an employment contract, and where employers often get caught out.

Overview

An employee usually owes duties of fidelity, good faith and confidentiality during employment, which means they generally must not actively compete with their employer while still employed. Whether you can stop competition after they leave is a different question and usually depends on carefully drafted contractual restrictions that go no further than reasonably necessary to protect a legitimate business interest.

• Whether the employee is merely planning a future venture or already competing while employed
• What the employment contract says about outside work, conflicts of interest, confidential information and post-termination restrictions
• Whether there is evidence of client solicitation, poaching staff, misuse of pricing, code, lists, strategy documents or other confidential material
• Whether the proposed restrictions are likely to be enforceable under UK law
• What practical steps you should take before you sign, before you rely on a verbal promise, and before the employee exits the business

What Employee Setting Up a Competing Business Means For UK Businesses

The core point is simple: an employee can sometimes prepare for a future business, but they generally cannot compete with you while still employed.

That distinction matters because many disputes turn on what the employee actually did before leaving. Quietly incorporating a company, taking early legal advice or sketching out a business plan may not, on its own, be misconduct. Contacting your clients, diverting work, copying your sales pipeline, recruiting co-workers or using work time and resources to build a rival business is far more serious.

What duties apply during employment?

Even if your employment contract is light on detail, employees usually owe implied duties during employment. In practical terms, that usually means they should not act against your interests in the course of their employment, misuse confidential information or place themselves in a clear conflict without disclosure.

Senior employees and directors often owe stricter obligations because of their position and access. A sales manager with deep customer relationships, margin data and future pricing plans presents a different level of risk from a junior employee with limited access.

For employers, this is where facts matter. A side business that has nothing to do with your sector may be permitted, especially if the contract allows outside work with consent. A side venture targeting the same clients, in the same region, with the same services, raises a very different issue.

Can an employee make plans to compete after leaving?

Yes, in some cases. UK law generally recognises that employees can make limited preparations to set up a business after employment ends. The line is crossed when preparation becomes active competition or involves misuse of your confidential information, solicitation of clients or staff, or a breach of express contractual duties.

A common founder scenario is this: a key employee resigns, and within weeks several customers move over to the employee's new company. The legal question is rarely answered by timing alone. You need to look at what happened before resignation, what information they took, what communications were made, and what restrictions were signed.

What about after the employee leaves?

After employment ends, the employee is generally free to compete unless a valid contractual restriction says otherwise.

That is why post-termination restrictions matter. These are often called restrictive covenants and can include clauses that stop the former employee from:

• working for or running a competing business for a limited period
• soliciting or dealing with certain customers or prospects
• poaching employees or contractors
• using or disclosing confidential information and trade secrets

These clauses are not automatically enforceable just because they appear in a contract. In the UK, restraints of trade are closely scrutinised. The employer usually needs to show the clause protects a legitimate business interest, such as confidential information, customer connections or workforce stability, and that the restriction is no wider than reasonably necessary.

What counts as a legitimate business interest?

The usual protected interests are well established. Most businesses rely on restrictions to protect one or more of the following:

• confidential information, including non-public pricing, margins, product plans, technical know-how, code, strategy documents and supplier terms
• customer relationships, especially where the employee had direct influence over key accounts
• workforce stability, where there is a real risk of team lift-outs or coordinated departures

You cannot usually use a non-compete simply to prevent ordinary competition. The clause must target a genuine risk to the business, not punish an employee for leaving.

Why this matters for startups and SMEs

Smaller businesses often assume their close-knit culture is enough protection. It usually is not. Startups and SMEs are often more exposed because customer relationships, pricing models and internal know-how are concentrated in a few people.

This is where founders often get caught. They hire quickly, use a short-form contract, skip tailored restrictive covenants, and only review the paperwork when a valued employee is already halfway out the door. At that point, your options may be narrower than you expected.

Legal Issues To Check Before You Sign

The best time to deal with the risk of an employee setting up a competing business is before you sign the employment contract, not when the employee is resigning.

A well-drafted employment contract cannot eliminate risk, but it can give your business practical leverage and clarity. If you rely on informal conversations such as, “Don’t worry, I’d never compete,” you may have very little to work with later.

1. Duties during employment and outside business activities

Your contract should clearly address conflicts of interest and outside work. If you are happy for employees to have side projects, say so, but make consent requirements clear where the project may overlap with your business or interfere with work.

Clauses often deal with:

• the need to disclose other paid work, directorships or material business interests
• limits on using company time, systems, equipment and data for outside activities
• an obligation to avoid conflicts and act in the employer's best interests during employment
• the employer's right to withdraw consent if the outside activity creates a real conflict

These clauses need to be practical. A blanket ban on all side work may be hard to manage and may create unnecessary friction. A targeted conflicts clause is often more useful.

2. Confidential information clauses

If the employee has access to commercially sensitive material, your confidentiality wording needs to be specific and realistic.

Think carefully about what information would actually damage your business if copied or used in a rival venture. That may include:

• customer lists and CRM data
• pricing models and margins
• sales forecasts and pipeline information
• supplier arrangements and rebate structures
• software code, product roadmaps and technical processes
• marketing strategy, launch plans and investor materials

Not every piece of internal information will be legally protected to the same degree, and something already public is different from a true trade secret. Clear drafting, sensible access controls and internal policies all help support your position.

3. Post-termination restrictions

Restrictive covenants should be tailored to the role, not copied from a template.

A junior administrator and a commercial director should not usually have identical restrictions. Courts look at reasonableness at the time the contract is made, so a one-size-fits-all clause can be risky.

Common restrictions include:

• non-solicitation clauses, stopping active approaches to customers or staff
• non-dealing clauses, stopping business with certain customers whether or not the former employee made the first approach
• non-poaching clauses, aimed at protecting your team from coordinated moves
• non-compete clauses, usually the hardest to justify and often used only where lesser protections are not enough

Duration, geography and scope matter. A six-month restriction may be easier to defend than a 12-month one, but the right period depends on the role and the sales cycle. A UK-wide restriction may be hard to justify if the employee only serviced a narrow region. A ban covering every possible service line may go too far if the employee only worked in one part of the business.

4. Garden leave provisions

Garden leave can be very useful where the employee has sensitive access and strong client relationships.

If your contract allows it, you may be able to require the employee to stay away from work during notice while remaining employed and paid. That can help you protect confidential information, manage client handovers and reduce the immediate competitive risk. It can also be a more practical step than jumping straight into a dispute about a non-compete.

5. Intellectual property and company property

If the employee helps create software, content, designs, systems or product material, your contract should also deal with intellectual property ownership and the return of property on exit.

Before you sign, check that the contract clearly covers:

• ownership of work created in the course of employment
• return of devices, documents, access cards and storage media
• deletion of company data from personal devices or accounts where appropriate
• ongoing obligations not to retain or use company materials after termination

This area often overlaps with competition concerns. A rival business built using your code base, templates, designs or internal playbooks raises more than one legal issue.

6. Evidence and process if concerns arise

You do not need to wait for a full-blown client loss before acting, but you do need to proceed carefully.

Before you accuse an employee of competing, make sure you have a proper factual basis. Internal rumours, a new LinkedIn profile or hearsay from a customer may not tell the full story. You may need to review contracts, access logs, emails, device usage, expense claims or customer communications, but do so lawfully and consistently with your policies and workplace policy framework.

Disciplinary action, suspension or dismissal should not be treated as automatic. The fairness of your process still matters, and a rushed decision can create a separate employment claim even if your concerns were genuine.

Common Mistakes With Employee Setting Up a Competing Business

The main risk is not only the employee's conduct. It is the employer's failure to prepare, document and respond properly.

Using generic restrictions that are too broad

This is one of the most common drafting problems. Founders often use precedent clauses that try to ban the former employee from working anywhere in the industry, for any competitor, for too long.

That may feel safer on paper, but overreaching wording can be hard to enforce. A narrower clause aimed at the real commercial risk is often stronger than an aggressive clause that looks unreasonable.

Waiting until resignation to review the contract

Many SMEs only check the employment contract once the employee has announced they are leaving. By then, you cannot retroactively fix missing clauses.

If a key employee has changed roles, gained access to more sensitive information or moved into a client-facing leadership position, their restrictions may need refreshing. Promotions and role changes are a good time for a contract review.

Assuming all side businesses are banned

Not every second job or side project is a competing business. An employee who sells handmade products online at the weekend is not necessarily in conflict with a B2B software company.

Employers who react too broadly can damage morale and create avoidable disputes. Focus on overlap, conflict, use of resources, and risk to confidential information and client relationships.

Ignoring confidentiality in practice

Confidentiality clauses are more persuasive when your business actually treats information as confidential.

If sensitive files are widely accessible, customer lists are casually shared, and departing staff keep broad access until the last day, enforcement becomes harder. Practical controls matter, such as role-based access, clean offboarding and clear internal policies.

Relying on a verbal promise

A founder may be reassured when an employee says they are leaving for a different reason or insist they will not approach clients. That may be true, but it is not a substitute for written terms and documented exit steps.

Before you rely on a verbal promise, make sure the contract, handover process and return-of-property steps are doing the real work.

Taking heavy action without evidence

Suspending or dismissing an employee without a fair process can create a second problem for the business.

If you believe competition is already happening during employment, gather facts, check your disciplinary procedure, and take legal advice before escalating. The strength of your position often depends as much on process as on the underlying suspicion.

Forgetting about staff and client communications

When a key employee leaves to join or form a competitor, uncertainty spreads quickly inside a small business. Clients may hear rumours. Team members may be approached. Messages sent in haste can make things worse.

Plan communications carefully. You want to protect the business without making unsupported allegations. A measured handover plan, access shutdown and consistent message to affected clients often helps reduce fallout.

FAQs

Can an employee set up a competing business while still employed?

Usually not if they are actively competing, soliciting clients, using your confidential information or creating a real conflict with their duties. Limited preparation for a future business may be possible, but the facts matter.

Is a non-compete clause always enforceable in the UK?

No. A non-compete is only likely to be enforceable if it protects a legitimate business interest and goes no further than reasonably necessary in scope, duration and geography.

What should I do first if I suspect competition from an employee?

Start by checking the contract, preserving evidence and reviewing what the employee has actually done. Do not assume dismissal is automatic, and do not rely only on rumours or verbal assurances.

Can I stop a former employee from contacting my clients?

Possibly, if the contract includes enforceable non-solicitation or non-dealing restrictions and they are drafted for the employee's role and customer contact. Confidential information obligations may also help depending on the facts.

Do senior employees pose a higher risk?

Often yes. Senior staff usually have more influence over customers and staff and wider access to confidential information, which is why their contracts often need more tailored restrictions and stronger garden leave provisions.

Key Takeaways

• An employee setting up a competing business is not always unlawful, but active competition during employment is a serious risk and should be assessed quickly.
• Your strongest protection usually comes from well-drafted employment contracts covering conflicts, confidentiality, garden leave and tailored post-termination restrictions.
• Restrictive covenants in the UK are not automatically enforceable, and overly broad clauses can fail when you need them most.
• Before you sign, tailor restrictions to the role, especially for employees with access to key clients, pricing, technical know-how or senior staff.
• If concerns arise, gather evidence carefully, follow a fair process and avoid relying on rumours or verbal promises.
• Good offboarding, access controls, return-of-property steps and clear internal policies can make a major difference when a key employee exits.

If you want help with employment contracts, restrictive covenants, confidentiality clauses, and exit arrangements, you can reach us on 08081347754 or team@sprintlaw.co.uk for a free, no-obligations chat.

Official Sources to Check

Rules and regulator guidance can change. Check the current official material most relevant to this issue before relying on the article:

• Acas: employment law and workplace guidance