Compliance’s role in managing employee side hustles

By Camélia Gardot, 25 March 2024

In the dynamic landscape of corporate operations, conflicts of interest pose a substantial risk, particularly when employees venture into new, parallel businesses.

This article explores the practicalities of managing these conflicts, delving into the potential risks associated with employee side hustles and providing a roadmap for compliance officers to navigate these challenges effectively.

Side business risks

Employees engaging in side businesses – part-time jobs or new company creations – can introduce a myriad of risks for a company. It’s like opening Pandora’s box: the allure of additional income can lead to divided loyalties, decreased productivity, and even breaches of confidentiality.

The challenge lies in not stifling entrepreneurial spirit but in balancing it with the company’s best interests.

Divided loyalties: Employees dividing their time and energy between their primary job and a side business might find it challenging to maintain unwavering loyalty. This can result in a decline in productivity, missed deadlines, and an overall decrease in the quality of work.

Confidentiality breaches: Engaging in a side business often involves exposure to industry knowledge, trade secrets, and confidential information. The risk of inadvertent leaks or misuse of this information poses a serious threat to the company’s intellectual property and competitive advantage.

Competitive conflicts: Employees running side businesses within the same industry might inadvertently create competition for their primary employer. This can lead to conflicts of interest, jeopardising the company’s market position and client relationships or its assets.

Compliance officer checklist

Before authorising an employee to pursue a side business, compliance officers should conduct a thorough assessment to mitigate potential risks.

Keep in mind a few key points and best practices:

1. Conduct proper due diligence of the side business organisation and seek to understand its operation specificities, including: 

• the legal form
• the commercial purpose or other non-profit organisation
• the foreseen relationships between the new entity and the company
• the potential of developing competing products or engaging in activities competing with the company’s business.

The importance of coordination between compliance and relevant business stakeholders – employee line managers, human resources, etc. – cannot be overstated in this context.

2. Assess the side business’s impact on the company’s assets, including intellectual property rights and resources. An unauthorised or uncontrolled use of any company’s materials, tools, or software in the framework of such parallel activities could have serious consequences for the company.

3. Evaluate the potential impact of the side business on the employee’s job performance. This includes considering the time commitment, any potential conflict with the company’s goals, and the ability to maintain a reasonable level of dedication to their primary role.

4. Identify and assess any potential conflicts of interest between the employee’s side business and the company’s operations. This includes scrutinising industry overlap, client relationships, and the risk of competing interests.

An often underestimated question is whether the side business plans to employ any recently departed or current employees of the company and, if yes, any with critical knowledge and capabilities. In such cases, compliance officers should look at the full picture and coordinate to have a global, holistic review of potentially multiple conflicts of interests.

5. Protect the company brand and reputation by ensuring the employee makes it clear that their engagement in such business is disconnected from any company involvement or support. The way they market or pitch the business could lead to corporate ‘parasitism’ if the company’s customers or partners could be misled to believe the side business is a spin-off or a development of the company’s business.

6. Ensure the employee has a clear plan to safeguard confidential information. This might involve implementing measures such as non-disclosure agreements or restricted access to sensitive data.

7. Ensure the employee is well-versed in the company’s policies regarding conflicts of interest. Clear guidelines should outline what constitutes acceptable side business, what are the boundaries in case of authorisation, and the rail guards to be put in place to ensure the side business operates according to the approved mandate.

Mitigation measures might include stricter signing and oversight requirements [1] for the employee’s activities or even adjusting the employee’s tasks, permissions, authorities, and powers.

8. Continuous monitoring: ensure the employee regularly reports any evolutions so that compliance can re-evaluate the situation and mitigate. The company should also secure regular audit rights over the employee’s compliance with the committed mitigation plan.

Importance of digitalised tools

‘Any sufficiently advanced technology is indistinguishable from magic,’ wrote science fiction writer Arthur Clarke.

A digitalised tool for recording conflict of interest declarations and monitoring mitigation plans offers several advantages.

Efficiency and accuracy: Digital tools streamline the declaration process, reducing the likelihood of oversight or errors associated with manual recordkeeping. This ensures more accurate and efficient management of conflicts.

Real-time monitoring: Digital tools allow compliance officers to monitor conflicts of interest in real time and over the whole duration of the situation. This enables prompt identification and intervention in case of any emerging issues, preventing potential risks from escalating.

Accessibility and transparency: A centralised digital platform provides accessibility to relevant stakeholders, fostering transparency. Allowing authorised personnel to access and review conflict declarations and mitigation plans promotes a collaborative and accountable environment.

Conclusion

In the tumultuous seas of corporate endeavours, conflicts of interest are the storms that can sink a ship.

Employee side businesses, if not managed carefully, can evolve from side hustles into significant threats for companies. By conducting thorough assessments before authorising such pursuits, compliance officers play a crucial role in mitigating risks.

The integration of digital tools further fortifies the company’s defences, ensuring conflicts of interest are transparently and effectively declared, discussed, decided, and documented.

Camélia Gardot is compliance partner at Airbus Defense and Space, heading the connected intelligence business line compliance. She has two decades of experience in advising international companies for large projects, strategic partnerships, mergers and acquisitions, and ethics and compliance matters.

This article has been republished with permission from Compliance Week, a US-based information service on corporate governance, risk, and compliance. Compliance Week is a sister company to the International Compliance Association. Both organisations are under the umbrella of Wilmington plc. To read more visit www.complianceweek.com