On 21 August 2008, the Supreme Court of New South Wales handed down a decision in Tullett Prebon (Australia) Pty Limited v Simon Purcell  NSW SC852, which addressed the enforcement of non-competition obligations during the term of an employment contract, in circumstances where the employee was on "garden leave".
The case is significant because, even though the employment contract was still on foot, the Court approached the question of whether the employee should be restrained from working for a competing business in the same (quite strict) way as if the employer was trying to enforce a post-employment restraint of trade. The Court took this view by drawing a distinction between the contract of employment (which in this case had not been terminated) and the "relationship" of employment, which had come to an end as soon as the employee stopped working. The fact that the employee was on garden leave did not alter the situation.
Employers need to be aware that keeping the contract on foot and sending the employee on garden leave may not make it easier to enforce any non-competition clauses in the contract.
The facts of the case were as follows:
- The Defendant, Mr Purcell, was employed under a fixed term contract. Neither party could terminate the contract, except for breach by the other, prior to 1 August 2009.
- The contract contained a clause prohibiting Mr Purcell from working for a competitor, or from soliciting clients or employees, throughout the term of the employment and for a period of three months afterwards.
- On 4 April 2008, Mr Purcell resigned his employment in order to work for a competitor. The employer notified him that the contract of employment was still on foot and directed him to stay away from the office and not to perform any duties. This direction was made on the basis of a garden leave clause in the contract. The employer proposed to continue to pay Mr Purcell's salary until the end of the term.
- Mr Purcell commenced working for the competitor. The employer applied to the Court for injunctions to restrain Mr Purcell from so doing, and from soliciting clients or employees, until the expiration of the term of the contract on 31 July 2009.
- The employer obtained an ex parte interim injunction which was then extended on an interlocutory basis until the final hearing.
At the final hearing, Justice Brereton identified the main issues as follows:
- Did the employment contract remain on foot?
- Were the contractual prohibitions on working for a competitor and soliciting void, in whole or in part, as unreasonable restraints of trade?
- To the extent that the prohibitions were valid, should the court nevertheless decline to enforce them because to do so would have the effect of compelling Mr Purcell to serve the company?
Justice Brereton decided that Mr Purcell should be restrained from working for a competitor, or from soliciting employees or clients, for a period of six months from the date upon which he attempted to resign (ie. 4 April 2008) and not for the full term of the contract.
The Court's reasoning was as follows:
- Mr Purcell had repudiated the employment contract by purporting to resign when the contract gave him no right to do so. The employer did not accept the repudiation but elected to affirm the contract. The contract, therefore, remained on foot. However, Mr Purcell's resignation had the effect of terminating the employer/employee relationship because services were no longer being rendered, wages were not being earned and the relationship of trust and loyalty was at an end.
- During actual employment, when the employee is rendering services, the employee's duty of fidelity will typically support extensive restraints on competing with the employer. But once actual employment ceases, even though the employment contract may still be on foot, any restraints on competition will not be enforced unless they are reasonable.
- Whether a restraint is reasonable involves the following two matters:
- Whether the prohibitions operate to protect a legitimate commercial interest, as distinct from merely precluding competition. The employer here did have a legitimate interest in protecting its customer and staff connections and to this extent the prohibitions were supportable.
- Whether the prohibitions extend no further than is reasonable to protect those interests. The prohibitions would have been reasonable during the continuation of actual employment, but because this was not such a case the Court approached the issue by asking this question: "What is a sufficient period to allow the employer to replace the employee and allow the replacement a reasonable opportunity to prove his or her competence to the clients?" The Court concluded that this was a period of six months after Mr Purcell stopped work. Accordingly, the prohibitions were not unreasonable only insofar as they operated for up to six months after 4 April 2008.
- The enforcement of the prohibitions to this extent would not present Mr Purcell with the choice of idleness (with overtones of destitution) or returning to work with his employer against his will. There were other fields of activity open to him.
The fact that the employer had offered to pay Mr Purcell's salary for the remainder of the term of the contract could not be relied upon to support a longer period of enforcement. A party cannot buy an injunction to which the party was not already entitled.
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.