Can My Current Employer Claim Rights to My Business?

Maybe. Every employee who dreams of creating a new business venture while maintaining their employment asks the question, “can my employer claim any ownership rights in my startup?” The answer to this question depends upon two factors — the nature of the startup and the conditions of the employment relationship. 

The most common provisions affecting an employee’s rights to start a business are discussed below.

What is a Duty of Loyalty to an Employer?

When an employee begins working for an employer, she is subject to default rules of loyalty to the employer. Also, she will be subject to any restrictions placed on the employee through an employment agreement.

Taking a Business Opportunity

Usurping a business opportunity would arise when the employee identifies a potential business opportunity as a result of her employment. 

For example, a potential customer or client contacts the employee (at the employer’s business) looking for consulting services. The employee informs the individual that the company does not generally carry on that type of consulting service. The employee then offers her personal services independent of the company. This would constitute usurping a business opportunity. 

The proper course of action would have been for the employee to offer the opportunity to the employer. If the employer does not wish to take on the employment opportunity, then the employee would be free to accept the engagement. In any event, the opportunity should be disclosed to the company. And, the employee should seek permission before pursuing the opportunity.

Competing with the Employer

Competing with the business entails carrying on any commercial activity that is the same or similar to any line of business of the employer. 

For example, if an employee is an accountant for a company. While employed, she opens up her own accounting office without the permission of the employer. Even if she carries on different accounting services than her employer, it would still be considered competing with the employer. The idea is that the employee could be providing those services as an employee of the employer. It does not matter that the employee does not steal clients directly from the company. Simply competing with the company is sufficient to violate the duty of loyalty to the company.

How Does a Non-Compete Agreement work? 

A non-compete agreement is an agreement between an employer and employee stating that the employee will not compete against the employer in the same field or business if or when the employee leaves the employer's company or employment. 

An employee may be subject to agreements that limit her ability to undertake a startup while working for the business. We have already discussed the general duty to not compete with an employer while an employee. 

The employee may be subject to a non-compete the agreement. For example, let’s assume that a physician practices medicine for a larger medical practice. She then wishes to break away from the practice to start her own practice. When coming to work with the employer, she signed a non-compete agreement. 

The non-compete agreement agreement restricts her ability to practice medicine within 50 miles of her current employer’s office. She ignores the agreement and opens an office a few miles down the road. If the employee violates such an agreement, a remedy may be the employer is entitled to bring an action to stop the former employee from competing with the business and to recover the compensation received by employee. While this is not exactly ownership of the employee’s business entity; but, it certainly limits the ability of the employee to carry on business and can disgorge the employee of profits if she does so.

What is a Work for Hire Agreement?

A work for hire agreement states that any work product created by an employee or independent contractor belongs to the the employer or principal. 

 It is common for employees to enter into agreements granting the employer ownership rights in any discoveries, inventions, or creations of the employee during the employment relationship. 

These types of agreement are extremely common for employees in technology companies. For example, assume that a business hires an employee to build computer software. The employee comes up with an idea for a software that is completely unrelated to the employer’s line of business. Nonetheless, developing the software is consistent with the activity carried on for the employer. In this scenario, the employer would have a claim of ownership interest in the intellectual property created by the employee. 

Even without an agreement in place, if the discovery, invention, or creation results from the use of employer resources, it is likely that the employer will have legal rights in the work product.