Most Read Contributor in Australia, September 2016
The contrasting outcomes of two recent decisions in the Federal
Court of Australia and the Supreme Court of Victoria demonstrate
the importance of ensuring that restraint of trade clauses within
employment contracts are carefully drafted.
HRX Holdings Pty Ltd v Pearson
In the first decision, of HRX Holdings Pty Ltd v
Pearson (2012) FCA 161 (HRX's
Case), the Federal Court upheld a two year restraint
against a former employee.
The employer, HRX Holdings Pty Ltd (HRX), a
human resources outsourcing company, sought to enforce a restraint
against its former director, Mr Brent Pearson, restraining him from
operating, or becoming concerned or interested in, a human resource
outsourcing or consulting business for a period of two years from
the date Mr Pearson ceased to be employed by HRX Holdings Pty Ltd
Prior to executing the restraint Mr Pearson had obtained legal
advice that a two year restraint of trade would be unenforceable at
law. After more than seven years' service with HRX, Mr Pearson
resigned in order to join a direct competitor.
The Court noted that Mr Pearson had played a pivotal role in
developing the business, creating pricing structures and business
models. He generated or had access to almost all of HRX's
confidential information and intellectual property and shared a
close working relationship with the company's client base.
The Federal Court found that the restraint was reasonable in the
circumstances and enforceable, placing particular emphasis on the
Mr Pearson's intimate knowledge of and involvement with
HRX's industry contacts, clients, business models and pricing
The protracted nature of the negotiations for the restraint
clause itself, during which time Mr Pearson received legal advice
regarding the enforceability of the proposed restraint;
The fact that Mr Pearson would continue to receive remuneration
for all but three months of the two year term via a share issue and
sale arrangement built into the restraint; and
The two year term accommodated the renewal cycle for the
majority of HRX's clients, allowing the company an opportunity
to secure its existing client base without competition from Mr
Wallis Nominees (Computing) Pty Ltd v Pickett
Facts of Case
In contrast, the Victorian Supreme Court held that a 12 month
restraint of trade was not enforceable.
The case of Wallis Nominees (Computing) Pty Ltd v
Pickett (2012) VSC 82 (Pickett's
Case) involved an attempt by a software consultancy
business to enforce a 12 month restraint against a former employee,
Mr Matthew Pickett, providing services to any client of Wallis
Nominees (Computing) Pty Ltd (Wallis Nominees) to whom Mr Pickett
had provided specific services, or had contact with whilst employed
by Wallis Nominees.
Mr Pickett was contracted out to various clients during more
than four years' service with Wallis Nominees. In January 2011,
Mr Pickett was placed with Grocon Pty Ltd (Grocon)
to act in a supporting role to Grocon's then IT Manager. When
Grocon underwent a restructure in November 2011, Mr Pickett was
offered and accepted the revised IT Manager's position with
Grocon. Upon his resignation from Wallis Nominees to take up
employment with Grocon, Mr Pickett was informed that he would be in
breach of his employment contract.
The Victorian Supreme Court held that Mr Pickett's skills
and experience did not constitute a legitimate business interest
capable of protection under a restraint. Sifris J commented:
"As the cases show, something more than exposure to or
interaction with the customer or client by the employee is
required. Even a close connection with or persuasive manner with
the customer or client may not be sufficient. A strong connection
is required. This would include personal or special knowledge
(which may include confidential information) of the client and a
significant degree of influence."
His Honour also found, notwithstanding that there was no
legitimate interest to protect, the restraint in any case provided
greater protection than was necessary as it not only prevented the
employee from providing services to clients of the employer that he
had been in actual contact with, but also in respect of which there
had been no contact.
When drafting restraints of trade employers should consider the
specific business interests that require protection and should
consider using the following strategies:
Offering some form of remuneration to the employee in exchange
for the restraint, especially if the restraint is for an extended
If client contracts are customarily fixed term (e.g. 12
– 24 months), tailoring the term of any non-competition
restraint to this cycle; and
Ensuring that the actions which the restraint prohibits are
targeted and relevant to the business interest which the employer
seeks to protect.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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Long experience representing many of Australia's leading employers has taught us that in employment litigation the identity of an employee's representative is a major factor in how employee litigation runs.
Australian employees receive certain entitlements (such as annual leave and superannuation) where contractors do not.
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