When is Restraint Unreasonable?
Recently the Federal Court considered a case in which an Australia-wide 2 year restraint period for a former director and founder of an HR outsourcing business was upheld and considered to be reasonable in the circumstances.
The case reinforces the importance of employers including well-drafted restraint clauses in their employment contracts to protect their business in the event that an employee with important company or business knowledge and contacts is not able to unfairly compete with the employer when leaving the company.
The case involved a former managing director who resigned from the company (HRX) to work in a senior position for a competitor of the business (Talent2). HRX sought to enforce the restraint clause contained in the employment contract which prevented the former MD from working for any HR outsourcing or consulting companies in Australia for a period of 2 years, in "…a business or operation similar to or competitive with" HRX.
The former MD argued that the clause was too wide and unreasonable in the circumstances, however after careful consideration of the contract itself as well as the overall circumstances of the case, the Court found that the restraint clause was not unreasonable and found in favour of HRX.
One of the factors considered by the Court was whether the parties had accepted the restraints as reasonable at the time that the contract was signed. Although Justice Buchanan commented that restraints of trade are, on the face of it, contrary to public policy and primarily invalid, he went on to say that “…a restraint of trade will not be invalid as contrary to public policy if it was reasonable in all the circumstances at the time it was made”. In this case some time had elapsed while the former MD was working for HRX and during this time the contract was negotiated with input from his accountant and solicitors. There was also express acknowledgement by the parties that the restraints and the duration were reasonable.
An additional factor in favour of upholding the restraint was that it was accompanied by a specific agreement that the former MD would receive an 8% shareholding in consideration for the restraint. The impact of this was that he was effectively paid for all but 3 months of the 2 year restraint period, so that any financial disadvantage was significantly decreased.
Justice Buchanan further referred to the former MD having “very special ability” in relation to connecting with clients and developing the business. He also took into account that the employee was in discussions with Talent2 prior to resigning from HRX, and that it was clear that the employee “…proposes to do the very thing which he agreed he would not do".
The restraint clause was upheld, and the Court ordered that the MD should be restrained for two years from working (in any capacity) for Talent2, any other provider of HR outsourcing (including recruitment process outsourcing), or any HR or recruitment consulting business in Australia.
It is interesting to contrast the decision in this case with that of Wallis Nominees (Computing) Pty Ltd v Pickett  VSC 82 (14 March 2012). The result in this case was quite different in that a 12 month restraint period was not upheld and the former employee was able to move to a management position with a former client of the employer. The Judge in that case found that the restraint clause was not enforceable as the company was not able to show that there was a legitimate commercial interest it was trying to protect. The court took into account the nature of the IT industry, the position of the employee (not the “human face’ of the company and no special relationship with the client) and that there was no risk of exploitation by the client.
In summary, Justice Sifris stated that several recent cases had shown that "more than exposure to or interaction with the customer or client by the employee is required" to justify an employer's protection.
The message for employers is to make sure you have a well-drafted employment contract which includes business protection clauses such as restraints, non-compete and non-solicitation clauses. Provided that these clauses are reasonable and mutually agreed, and protecting a legitimate business interest, they can be enforced and will provide the business protection that was initially intended.
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Author: Christine Broad
It is intended as a guide only and does not replace specific legal advice.