The issue in the given case is related to the right of employer under the employment contract to prevent its employee from making the beach of condition of contract.
Employment Contract: A contract executed between the employer and employee for ascertaining the conditions of employment is known as the employment contract. The terms and conditions determined in the employment contract are mutually agreed by both employer and employee and also imposed on both of them. These conditions generally covers the matters in regards of working hours, pay rate, benefits, job procedure, duties, termination clause and other employment related terms (Walsh, and Walsh, 2019). The breach made by any party can be claimed by the non-breaching party. In addition to that several other clauses are also required to be inserted into the contract of employment which prohibits an employee from performing unethical and unprofessional. In order to protect the valuable data and business information, the company imposes certain restrictions on the employees. These restrictions are inserted in the employment contract of the employees to make them legally enforce. These clauses are known as Restriction Covenant which prevents the employees from competing with the ex-employer after the termination of employment. The restriction covenants are imposed on the employee for a specific period of time after their termination from job (Wang, Song, Cheng, Luo, Gan, Feng, and Xie, 2016). Several restriction clauses which could be inserted in the employment contract are following:
It prohibits the employee from entering into direct deals with their ex-clients. This restriction can even stop the employees from providing trustworthy advice to their previous clients. This prohibition is usually imposed on the employees with a specific professional expertise.
It is almost similar to the non-dealing clause as it prohibits the employees from having a direct deal or business relationship with the clients or customers of ex-employer.
This clause is used by the employer to prevent the departure of mass number of employees or key employees from the organization by following the termination of one employee (Ghosh, and Shankar, 2017). It prohibits the employee from manipulating or influencing the other employees of organization for leaving their jobs.
This is a major restriction covenant which is usually inserted by all the organizations in the contract of their employees to avoid an unhealthy competition in business. It prevents the employees from working with some determined companies, industries or within a certain geographic boundaries for a specific period of time just after they left the ex-employer. This is done by the companies to protect their valuable business information and to maintain the confidentiality of critical data. The sharing of such confidential business data could result into a benefit to competitors and curse for the company (Johnson, Lavetti, and Lipsitz, 2019). This clause also prohibits the employees to initiate a similar business as the ex-employer. Therefore this covenant estops the employee and prohibits his ability to perform against the interest of ex-employer’s business. According to this clause an employee cannot become the part of an organization having similar business in the role of owner, employee, contractor, investor or others. Although a company is required to prove the required legislative reasons for imposing such clauses on the employees.
If an employee is alleged into the Court for the breach of non-compete clause then firstly the company is required to prove the fact that the employee was engaged in a legislative part of business which needed to be protected. In addition to that the period for imposing the restriction and geographical limits determined under the contract are considered by the Court. Also it is necessary that against the signing of such clause, the employee was offered with specific benefits by the employer which shall also be considered by the Court (An, 2019). If Court finds a legitimate reason under which the protection was required then it may impose penalty on the employee for the breach of clause or stop him from joining the other company.
As per the details given in the case, Joey was a computer programmer and working with the Great Games Pty. Ltd for last two years (Azevedo, Pereira, and Rodrigues, 2018). He had a contract of employment with the company and a specific clause has been added into his contract that ““he will not for the duration of the employment contract or for a period of one year after the conclusion of the employment undertake design activities in Australia for the purposes of the production of electronic games or any other form of entertainment”. This clause has been inserted into his contract to prevent him from joining any other company just after his termination so that the company could ensure the safety of its confidential data. However Joey received an employment offer from Computer Animated Films Inc. (CAN), which offered him five times more remuneration than his former salary. Grey also accepted the offer without considering the restriction clause imposed by the Great Games Pty. Ltd as per which he was not allowed to be employed in another company for a period of one year after his termination. In that case Great Games has the right to prevent Joey from joining or accepting the employment offer of CAN as he was legally bound under the employment contract with the Great Games Pty. Ltd. The Great Games had their legitimate reason to stop him as Joey was engaged in the programing function of games which is associated with wider part of technological and confidential data on the basis of which the company enjoying the core competitive advantages in the market (Stanberry, and Aven, 2017). Hence to protect such information from sharing, the Great Games may legally prohibit Joey from accepting the employment offer of CAN.
On the basis of above discussed rules and laws, the restriction covenant prevents the employees from sharing and using the confidential business data of ex-employers with another business entities and for such purpose the ex-employer may impose some restriction on them. Here in this case Joey was legally obligate to follow the restriction made by the Great Games Pty ltd and in case of breach of such clause by Joey, the company has the right to present suit against Joey before the Court.
In the given scenario, an appropriate business stricture is required to be advised to Harry for the opening of his new bakery.
There are various structures of business can be adopted to begin a new business. The selection of business structure varies with the availability of resources and capital for business (Hurst, 2018). The structure of business also determined by the number of members engaged in the proposal of business. These different business structures are proprietorship, partnership, private company, limited liability partnership, public company and other venture structures. The sole proprietorship is a most favorable business structure for an individual as he has limited resources and capital. Also it provides several other core benefits to individual which cannot be obtained from other business structures. There is only one member in the sole proprietorship that possesses all the rights and responsibilities of business. He is entitled to enjoy all the profits gained in the business and solely liable for bearing the losses in business (McKay, Carr, Rothwell, Wiley, and Scherer, 2019). Apart from that there are several other benefits of this business structure such as:
To start a sole proprietorship business, an individual does not require following a lengthy and complex procedure. For initiating a business under such structure, no authoritative permits and legal formalities are required. Similarly while winding up the business, the owner is only required to meet the debts of business.
In the sole proprietorship business structure, the owner can deploy his available resources at the best use. This is economically efficient option for business as it needs minimum capital and resources. There is no implementation of government fee or charges while starting the business or making its registration. Also the legal compliances and regulations are very less in the sole proprietorship business (Kehoe, 2018). The owner in the sole proprietorship is the most rightful man hence he could make the decisions in the business to mitigate the irrelevant cost and also have the full control over the business.
The owner of sole proprietorship has all the right in the business hence he possesses the overall control in the business. He is not answerable to any other person in relation to his business. Being a single person in the business, he can make quick decisions to avail the opportunities in the business.
There is no separate imposition of taxation on the sole proprietorship business from its owner. It makes the taxability of sole trader simple and less complex. Also the sole trader is not needed to meet different reporting requirements for a specific period (Jones, 2020).
The owner of sole proprietorship works as a single employee in the business hence the risk to leak or share the business information with outsiders is very less. Also he does not need to file any business reports to either state or federal government which makes the information of business private and secure.
The sole proprietorship does not have a separate legal identity from the owner. It enables the sole trader to adjust the losses of business out of his taxable income.
In the given case law, Harry who has an experience in the bakery works wants to begin his own bakery business. For the purpose to start the business, he was finding an adequate and suitable structure for his business. He has an amount of $50,000 for initiating the business and also decides to take a shop on lease for the bakery. As per the requirements of his business, Harry can go with the option of proprietorship business structure. Harry has no prior experience in employment or business and also has a limited capital to invest in the bakery business. In that case the sole proprietorship business will cause no additional cost to him for the commencement of business and there are no complex legal requirements to be followed up by Harry (Musah, 2017). Also he is not needed to enter into any legal or ethical contract with the other parties or stakeholders in the business because he is the sole owner of bakery. He will have the ultimate powers in his hands to run the business and determine the relevant factors in the business.
In addition to that Harry will not require following different reporting requirements in the sole proprietorship business structure. In this business structure, Harry can enjoy all the profits and benefits of the business solely and adjust the losses of business out of his personal taxability. The sole proprietorship business is not a separate entity from the owner which reduces the obligations of separate business reporting of business to any specific authority (Jackson, Looney, and Ramnath, 2017). Hence Harry should go for the sole proprietorship business structure for starting his bakery business.
It could be states after the analysis of above mentioned rules and provisions that sole proprietorship business structure is most favorable option for an individual with minimum capital and resources. Hence Harry should go with the business structure of sole proprietorship for opening of his bakery as it will cost him minimum registration charges and other reporting fee. Also he may avail the other benefits in future from such business structure such as full control, easy taxability, simple exit procedure and sole right in business.
Walsh, P. and Walsh, T., 2019. Folau v Rugby Australia: Protecting a business' brand in the age of social media. Bulletin (Law Society of South Australia), 41(6), p.12.
Wang, F., Song, H., Cheng, Y., Luo, N., Gan, B., Feng, J. and Xie, P., 2016. Converging divergence: the effect of China’s Employment Contract Law on signing written employment contracts. The International Journal of Human Resource Management, 27(18), pp.2075-2096.
Ghosh, S. and Shankar, K., 2017. Optimal Enforcement of Noncompete Covenants. Economic Inquiry, 55(1), pp.305-318.
Johnson, M.S., Lavetti, K. and Lipsitz, M., 2019. The labor market effects of legal restrictions on worker mobility. Available at SSRN 3455381.
An, R., 2019. Financial Covenant Restrictions and Corporate Downsizing (Doctoral dissertation, The Chinese University of Hong Kong (Hong Kong)).
Azevedo, A., Pereira, P.J. and Rodrigues, A., 2018. Non-compete covenants, litigation and garden leaves. Journal of Business Research, 88, pp.197-211.
Stanberry, K. and Aven, F., 2017. Have Noncompete Agreements Evolved Into an Unnecessary Restriction on Job Movement?. Compensation & Benefits Review, 49(1), pp.3-8.
Hurst, J., 2018. Sole proprietors' perceptions of benefits of and barriers to using digital marketing. Journal of Aesthetic Nursing, 7(2), pp.108-109.
McKay, S., Carr, K., Rothwell, M., Wiley, S. and Scherer, H., 2019. Understanding Business Structures, Markets, and Risk Management Strategies.
Kehoe, K.E., 2018. The propitious puzzle for small business owners: Understanding the Section 199A deduction.
Jones, S., 2020. Retirement, small business, and CGT: capital gains tax. Tax Breaks, 2020(408), pp.2-4.
Musah, A., 2017. Benefits and challenges of bookkeeping and accounting practices of SMEs and its effect on Growth and Performance in Ghana. Journal of Accounting, Business and Management (JABM), 24(2), pp.16-36.
Jackson, E., Looney, A. and Ramnath, S., 2017. The rise of alternative work arrangements: Evidence and implications for tax filing and benefit coverage. Office of Tax Analysis Working Paper, 114.
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