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Finding out an employee is setting up a competing business can feel like a punch to the gut.
You might be thinking: Can they do that? Are they stealing my clients? What can I legally do without making things worse?
The good news is you’re not powerless - but in New Zealand, the “right” response depends heavily on what your contracts say, what the employee is actually doing, and whether you follow a fair process. This guide is updated to reflect current expectations around confidential information, online side hustles, and modern workplace policies.
Let’s walk through the key legal issues and practical steps you can take to protect your business (and avoid an expensive dispute).
Is It Illegal For An Employee To Start A Competing Business In New Zealand?
Sometimes yes, sometimes no - and this is where a lot of employers get tripped up.
In NZ, an employee generally owes you duties while they are employed, including:
- a duty of good faith (both employer and employee owe this to each other), and
- a duty of fidelity/loyalty (the employee shouldn’t actively work against your interests while employed).
That doesn’t automatically mean an employee can never start a business on the side. Many employees legitimately run side businesses - even in the same industry - without breaching the law. The problem is how they do it and what they use to do it.
An employee setting up a competing business is more likely to become unlawful (or at least actionable) if they:
- solicit or poach your clients, suppliers, or staff while employed
- use your confidential information (pricing, client lists, systems, marketing plans)
- use your time, resources, or equipment to build their competing business
- misrepresent themselves as still acting on behalf of your business
- breach an agreed restraint clause (like non-compete or non-solicitation obligations)
Key point: you usually need evidence of a breach (or a clear contractual restriction) - not just suspicion that a business exists.
What Are The Biggest Legal Risks For Your Business?
When an employee starts a competing business, the legal risk isn’t just “they might leave”. It’s that your business can lose value quickly and quietly.
Common risks include:
Loss Of Clients And Revenue
If the employee is approaching your customers, undercutting your pricing, or using relationships they built through your business, you can lose repeat revenue and goodwill.
Misuse Of Confidential Information
Even if an employee doesn’t “steal” documents, they may rely on internal knowledge - like your margins, supplier terms, lead sources, or client renewal patterns. The more senior the employee, the more likely this is an issue.
Confidential information disputes are often messy because:
- information can be copied quickly (especially digitally)
- the employee may argue it was “general industry knowledge”
- the damage can be hard to quantify
Damage To Your Brand
Clients may get confused if the employee markets themselves in a way that looks like your business - especially if they use similar branding, a similar trading name, or the same social media audience.
If you’re in a crowded market, doing the basics early - like protecting your brand name - matters. Issues around Trade Mark infringement often pop up in “employee competitor” disputes because the lines between competition and brand confusion can get blurry fast.
Internal Workplace Fallout
Even if the competing business hasn’t harmed you yet, it can create:
- conflicts of interest
- morale issues
- loss of trust in leadership and team stability
This is why having a clear Conflict of interest policy can be a real game-changer - it sets expectations before problems escalate.
What Does The Employment Agreement Need To Say?
If you’re dealing with this situation now, the first step is simple: pull out the employment agreement.
A well-drafted Employment Contract will usually cover (or at least support you on) the key questions: what the employee can do during employment, what happens after they leave, and what information must be protected.
Here are the clauses we typically look for.
Confidentiality Clause
This clause should clearly define what counts as confidential information and what the employee must do with it (e.g. not disclose it, not use it outside their duties, return it when employment ends).
The clause should cover information in all forms - not just printed documents. Modern disputes often involve:
- CRM exports
- screenshots
- emails forwarded to personal accounts
- cloud storage links
- client conversations via messaging apps
If your agreement is vague, enforcement becomes harder.
Restraint Of Trade / Non-Compete / Non-Solicitation Clauses
In NZ, restraint clauses can be enforceable, but only if they’re reasonable and protect a legitimate business interest (like client connections or confidential information). Overly broad restraints can be struck down.
Common restraint types include:
- Non-compete: prevents working in a competing business within a certain area/time
- Non-solicitation: prevents approaching your clients, suppliers, or staff
- Non-dealing: prevents doing business with your clients even if the client initiates contact
Even a strong restraint clause isn’t “self-enforcing”. You still need the facts and the right process.
Outside Work / Secondary Employment Clause
This clause can require an employee to disclose outside work, obtain consent, or ensure it doesn’t create a conflict.
This is particularly important now, because many employees operate side hustles through:
- Instagram and TikTok
- Shopify
- Fiverr/Upwork
- marketplaces or online directories
The goal isn’t to ban outside work - it’s to manage conflicts early and fairly.
IP Ownership (If Relevant)
If your employee creates content, designs, software, training materials, or processes as part of their role, you want clarity on who owns that intellectual property.
This can matter a lot if the competing business uses:
- your templates or documents
- your systems and workflows
- materials they created “for you” but now reuse elsewhere
If you’re not sure what your contract covers, getting a quick legal review can save you from trying to enforce the unenforceable (or missing a key right you actually have).
What Steps Should You Take If You Suspect An Employee Is Competing?
When emotions run high, it’s tempting to go straight to accusations, immediate dismissal, or a threatening email.
That approach often backfires - especially in NZ, where employment disputes can quickly become personal grievances if the process isn’t fair.
Here’s a practical and legally safer approach.
1. Confirm The Facts (Don’t Assume)
Start with what you know, not what you suspect.
Examples of useful evidence might include:
- public advertising for the competing business
- website screenshots showing the same services/target customers
- client reports that they were approached
- proof of use of your documents, images, or branding
- records showing work was done for the side business during paid hours
Be careful about how you collect evidence. Monitoring and surveillance can create privacy risks if done incorrectly - especially if you’re accessing personal devices or private accounts. If workplace monitoring is relevant to your situation, it’s worth checking your obligations around cameras in the workplace and privacy expectations before you take action.
2. Check Your Policies And Past Practice
Have you previously allowed side hustles? Have other staff disclosed secondary work without issue?
Consistency matters. If you suddenly “crack down” on one person without a clear basis, that can look unfair - even if you have genuine concerns.
3. Raise It With The Employee (In A Proper Process)
If the issue is serious, you’ll usually want to raise it formally (rather than casually confronting them in the hallway).
Depending on the circumstances, this might involve:
- an investigation meeting
- putting concerns in writing
- giving the employee a genuine opportunity to respond
- considering their explanation with an open mind
Even where you believe there’s clear wrongdoing, NZ employers are expected to act fairly and in good faith. A rushed process can create legal exposure for you.
4. Consider Interim Risk Controls
If you have a genuine concern about ongoing harm (for example, client poaching or data misuse), you may consider interim steps such as:
- removing access to sensitive systems
- changing passwords or restricting permissions
- directing communications through a manager
- considering a stand-down (but only where lawful and properly handled)
Whatever you do, document your reasons and keep it proportionate to the risk.
5. Decide On The Right Outcome
The outcome depends on what happened and what your documents allow. Options can include:
- a written warning
- requiring the employee to stop the competing activity while employed
- agreeing boundaries (e.g. no solicitation, no overlap with your clients)
- negotiated exit and settlement
- disciplinary action up to termination (only where justified and fairly handled)
In more serious cases, you may also need to consider legal steps outside the employment relationship (for example, to protect confidential information or prevent solicitation).
How Do You Prevent This Problem In The First Place?
Not every “employee competitor” scenario comes from bad intentions. Sometimes an employee genuinely thinks a side hustle is harmless - until it isn’t.
Prevention is usually cheaper, faster, and less stressful than reacting after damage is done.
Set Clear Expectations Early
Many issues can be avoided by being clear about:
- what counts as a conflict of interest
- what outside work is allowed (and when approval is needed)
- how confidential information must be handled
- what happens when employment ends (return of property, device access, client communications)
This is often done through a mix of the employment agreement and supporting workplace policies.
Lock Down Confidential Information And Access
Practical controls can be as important as legal clauses. For example:
- limit access to client lists, pricing, and templates to people who genuinely need it
- use role-based permissions in your CRM and cloud storage
- have clear offboarding checklists when someone resigns
If you’re collecting and storing client data (especially digitally), it’s also a smart time to review your public-facing Privacy Policy and internal privacy handling practices - because data disputes often sit alongside “competing business” disputes.
Use The Right Business Structure And Internal Agreements (If You’re Growing)
If you have key employees and you’re scaling, you might also consider whether your overall structure supports stronger governance and decision-making.
For example, if you operate through a company, you might update or adopt a Company Constitution so the rules around governance and decision-making are clear as you grow.
And if your “employee” is actually also a co-founder or part-owner (which creates a different set of risks), a tailored Shareholders Agreement can be critical for dealing with exits, competing activities, and protection of company value.
Don’t Rely On DIY Templates
It’s tempting to download a free employment contract template and call it a day - but this is one of those areas where small wording differences can make a big difference.
If your restraint clause is too broad, it may not be enforceable. If your confidentiality clause is vague, you may struggle to stop misuse. If your outside work clause is missing, you may not have a clear basis to require disclosure.
Having your contracts drafted (or at least reviewed) for your specific role types and industry is one of the best ways to be protected from day one.
Key Takeaways
- An employee isn’t automatically breaking the law by setting up a competing business, but they can breach duties of good faith and loyalty if they compete while employed in a way that harms your business.
- Your employment agreement matters - especially confidentiality, restraint of trade, outside work, and IP ownership clauses.
- Before taking action, confirm the facts, gather evidence carefully, and follow a fair process to reduce the risk of a personal grievance.
- Misuse of confidential information and client solicitation are usually the biggest practical risks, even where the competing business looks “small” at first.
- Preventive steps like clear conflict-of-interest rules, access controls, and well-drafted employment documents can reduce the chance of disputes later.
- If the situation involves a senior employee, key client relationships, or sensitive data, it’s worth getting tailored legal advice early - it’s often easier to manage before the relationship breaks down completely.
If you’d like help reviewing your employment contracts, restraint clauses, or managing an employee competition issue the right way, you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.
