Deal or no deal? Three recent cases demonstrate that restraint
of trade clauses are still a minefield
In HRX Holdings Pty Ltd v Pearson, the
Federal Court upheld a restraint of trade clause against the
co-founder of a HR outsourcing company, preventing him from
competing in the HR outsourcing industry in any way for a period of
two years. Sound excessive? Well, in exchange for the restraint,
the company agreed to pay him for the duration of the restraint
period (barring 3 months) and grant him an 8% shareholding in the
company. The restraint clause was drafted specifically with him in
mind. The terms of the restraint were negotiated over several
months, and at the end of negotiations, the parties expressly
agreed that the restraints were reasonable.
So is the key to enforceability seniority and a restraint
payment? Not necessarily.
In Birdanco Nominees Pty Ltd v Money
the Victorian Court of Appeal ordered a junior former employee to
pay his ex-employer $188,000 in liquidated damages following a
restraint breach. After resigning, the former employee sought to
provide services to a client of his ex-employer, for a
significantly cheaper fee. The client chose the cheaper option, and
dumped Birdanco. The former employee argued that the work he was
performing for the client was different from the work he performed
for the client while at Birdanco; because he was now a qualified
accountant and had been unqualified while at Birdanco. The Court
didn't buy it, and found that the restraint clause was
"relatively narrow", was designed specifically to prevent
employees after leaving the company from "exploiting
relationships with clients in order to re-establish that client
relationship in a different employment capacity", and that
this is an interest which an employer is entitled to protect.
Does this mean that courts are simply more willing to enforce
restraints? Not so.
In Wallis Nominees (Consulting) Pty Ltd v
Pickett, an IT manager was not
prohibited from taking up a management position with a former
client despite there being a restraint of trade clause in his
employment agreement. The Victorian Supreme Court found the
restraint clause to be void and unenforceable because it ventured
further than necessary to protect a legitimate interest; and that
the company had failed to identify a legitimate interest that
warranted protection. The court found the employee was not the face
of the company, did not control the business of the client and his
consultancy position was not designed to provide the basis for a
special relationship to develop.
Take home message?
A one size fits all approach is not going to do the trick. In
drafting restraint clauses, it is vital to take account of the
specific interest that the clause is seeking to protect and the
circumstances of the employee sought to be restrained. Then
you'll have a good chance of being able to enforce the
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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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