Protect Your Goodwill

Goodwill is not easy to define or value. It is that intangible asset in a business which makes the business worth more than just the sum of its parts.
Goodwill is usually tied up with the profitability of a business but that profitability is often itself determined by a combination of the quality, strength and uniqueness of your product and service offering, pricing, customer loyalty and brand. For most business owners, including owners of automotive workshops, goodwill is developed with hard work over many years. What many business owners don’t necessarily appreciate is that they often put a lot of trust in employees to protect their business goodwill.

Employees are typically (and unavoidably in most cases) given access to the inner-workings of your business. They know who your customers are, how you price and how you expect your products and services to be delivered. Unfortunately, from time to time an ‘enterprising’ (or disgruntled) former employee will setup business in competition by undercutting on price and taking the former employer’s best ideas, customers, and staff. Such an event will spell the death knell for many businesses.

There are things you can do proactively to reduce the risks of an employee stealing your business and reactively if it has already happened.

First, let’s look at what you can do reactively to protect your goodwill. Even if you do not have a formal written employment contract, the law imposes duties on employees:

• to act in the best interests of the employer (during the course of the employment); and

• not to misuse (both during and after employment) any of the employer’s confidential information.

Employees who start canvassing your customers whilst they are still employed will generally be breaching their duty to act in your best interests and can be sued. Likewise, you would have a claim against a former employee who used your confidential information to their advantage. Determining what information is and is not confidential is not always straightforward. For example, your internal customer lists are usually confidential but your price lists would not be treated as confidential information if they were widely published.

What about the proactive steps you can take to try and protect your goodwill? It is useful to set the ‘ground rules’ in your employment contracts and employee policies. For starters, it is worthwhile setting out in your contract what business information your employees must treat confidentially. Also, you can also require you employees to comply with reasonable post-employment restraints of trade. These restraints can be used to prevent former employees canvassing to your clients or setting up business within a reasonable geographical location to your business and for a reasonable period of time. The key is that the restraints have to be reasonable. The purpose of any restraint is not to prevent the employee from taking up employment elsewhere or competing with your business on a level playing field but is to instead to protect your goodwill. There is no point seeking to prevent your apprentice mechanic from working in the automotive industry for the next two years!

You need to keep in mind that you will need evidence that your former employee has been canvassing clients whilst still employed or has taken your confidential information. You might know that your employee has taken your confidential information but you still need to prove it. You should talk to your IT consultant about whether it is feasible to:

• Adopt computer systems which keep a track or log of employee’s computer use (n.b. this will usually require that employees must be given separate computer logins); and
• Make certain sensitive and confidential information inaccessible to those employees that do not need access.

It is important though to have some perspective. The reality is most employees are honest and decent and, even if given the opportunity, will not steal your goodwill. However, just as a business would not contemplate operating without insurance, given the damage that a dishonest employee can have on a business it makes sense to take some precautionary measures such adopting reasonable restraints of trade in employment contracts and protecting confidential information with computer surveillance systems.

Nathan Donovan,
nathan@donovanlegal.com.au