Australia: When does gardening leave count for the purposes of a restraint period?

Last Updated: 4 September 2016
Article by Stephen Trew and Rebecca Byun

The recent decision in DP World Sydney Limited v Guy [2016] NSWSC 1072 (1 August 2016) raises again the question of when a period that is served on gardening leave will count towards any applicable restraint period under an employment contract.

Background

In this decision, Mr Guy was employed by DP World at Port Botany as its operations manager. On 28 April 2016, Mr Guy gave notice of his resignation and that he would be joining a competitor of DP World being Asciano. Mr Guy was immediately placed on garden leave pursuant to the terms of his employment contract. In addition, his contract contained a 3 month restraint against, among other things, engaging in any business or activity that is the same or similar to the business activity he was engaged in at DP World.

Mr Guy asserted that the 3 month garden leave period counted towards the 3 month restraint period and therefore he was free to commence employment with Asciano on 29 July 2016. DP World opposed that position and commenced proceedings seeking an interlocutory injunction restraining Mr Guy from commencing his employment with Asciano until 27 October 2016.

Interaction between gardening leave and restraints

The court first looked carefully at the terms of the employment contract and in particular considered how it would interpret the relevant provisions of the restraint clause including the time from which the restraint was said to operate. Under the relevant clause, the restraint operated for the "Restraint Period" which was defined to mean "... the period of 3 months starting on the date of termination of your employment".

Mr Guy argued that the restraint was intended to operate from the termination of the employment relationship (as opposed to the employment contract) and that his employment relationship was terminated at the point he was placed on gardening leave. Accordingly, the restraint should have commenced operation at this point and not at the point the period of gardening leave expired. DP World argued the reverse and claimed that his employment only ended following the 3 month gardening leave period at which point the restraint should commence operation.

The court approached this question as a matter of construction on the relevant employment contract. On the terms of the contract, the court held that the relevant restraint period was to be interpreted as commencing following the cessation of the employment and was not intended to refer to the cessation of the employment relationship only (as distinct from the employment contract).

Mr Guy sought to rely upon the earlier New South Wales decision of Tullet Prebon (Australia) Pty Ltd v Purcell [2008] NSWSC852 in which the period of garden leave was held to count towards the restraint period. However, White J distinguished that earlier decision on the basis that it concerned a different situation where the employment relationship was brought to an end (while the employment contract remained on foot) as a result of the employee unilaterally repudiating the employment contract by "walking away" from a fixed term contract. White J held that in the current case, there was no repudiatory conduct as Mr Guy was placed on garden leave pursuant to the express terms of the employment contract. As such, the employment relationship was maintained and therefore it could not be said that Mr Guy's employment ended at the point of commencing garden leave.

Considering all this, the court held that as a matter of construction the time served on garden leave did not count towards the relevant "Restraint Period" under the terms of the restraint clause of Mr Guy's employment contract.

The court then turned to the further relevant question of whether the post-employment non-compete restraint was reasonable and enforceable. The court went through the usual criteria for assessing the validity of the 3 month non-compete restraint of trade clause and judged this in the context of the restraint potentially operating in effect for a period of 6 months in light of the 3 month garden leave period. The court held that in the particular circumstances, and based on the nature of the confidential information to which Mr Guy had access to during the term of his employment, that an effective 6 month restraint period was in fact reasonable and enforceable.

Accordingly, and also taking into account an offer by DP World to continue to pay Mr Guy during the operation of the additional 3 month restraint period, the court ordered an interlocutory injunction restraining Mr Guy until 27 October 2016 from joining Asciano pending the court being able to consider and determine the matter in a final hearing.

Key lessons for employers

Some key lessons for employers arise out of this decision, including the following:

  1. Revisit the terms of your employment contracts and consider whether each relevant contract on its terms draws any distinction between the formal termination of the employment contract and ceasing to perform duties or a more general reference to the employment relationship;
  2. Consider whether your contracts have garden leave provisions. These are powerful tools that employers can use as part of protecting their business when an employee resigns with the intention of leaving to compete. It is much easier to enforce a garden leave provision than a post-employment restraint of trade provision; and
  3. If there is a garden leave provision, give specific consideration to the interaction between the garden leave provision and the restraint of trade provision. In this regard, there is no one right answer as to whether a garden leave period should or should not count towards any post-employment restraint obligation. Be clear as to what you intend and ensure that the intended period of restraint can be justifiable as reasonable and therefore enforceable.

This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.

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