Economy

Be careful how you restrain former employees

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The courts are taking a dim view of long post-employment restraint agreements, so employers need to look at their options. By PETER VITALE

By Peter Vitale

Employment restraint agreements

The courts are taking a dim view of long post-employment restraint agreements, so employers need to look at their options.

Business owners are often informed from a range of different sources about the importance of putting in place measures to “protect” the business against the risk of senior employees leaving the business.

The types of measures commonly identified include imposing comprehensive confidentiality obligations and post-employment restraints on the relevant employee.

In a recent decision, the Supreme Court of Victoria has emphasised the increasing distaste for Australian courts of enforcing lengthy restraint periods. It also reinforces that employers have other means that they should prefer to protect client relationships after a key employee leaves.

In BearingPoint v Hillard, the Supreme Court refused to enforce a 12 month restraint contained in the contract of the managing director of the business. Robert Hillard was acknowledged as prominent and well regarded in the information technology consulting industry.

The court found that he was the leader of BearingPoint’s business in Australia and one of the keys to its client relationships. Hillard entered negotiations to join a rival consulting firm.

After discovering his intentions, BearingPoint entered discussions and correspondence with Hillard and directed him to take “garden leave” – that is to not attend for work or contact customers or employees, even though he remained an employee of the company. Hillard argued that this direction was a fundamental breach of the contract of employment that enabled him to treat the contract as ended.

The court disagreed. It has long been recognised that there are a limited number of cases in which an employer has a positive duty to give an employee work. Examples often cited include employees who rely on public exposure, such as actors, or continued use of skills, such as a surgeon.

The interesting aspect of this case was that the court did not follow suggestions by other courts in recent years that the category of such employees could be broader. Even though Hillard was an acknowledged leader of the business and was prominent with clients, BearingPoint was under no obligation to provide him with work. The company was entitled to direct him not to attend the office and not perform any work for the period of the notice of termination specified in his contract of employment, in this case 180 days.

The court also refused to grant the company’s request to impose an injunction on Hillard to prevent him working for his new employer for the period of the notice period. This is consistent with the traditional refusal of the courts to force an employee to work for a particular employer.

The court also found that the 12 month restraint period was too long to be reasonable, even though Hillard’s seniority and importance to the business had been acknowledged. The notice period and perhaps a further short period would be sufficient for the company to re-establish and protect its client relationships.

The court also decided that a period of 12 months was too long a period to prevent Hillard attempting to entice employees of BearingPoint to move to his new employer with him, though the validity of this kind of restraint remains an uncertain question. The court suggested that a restraint that applied to the whole of Australia was not invalid on the ground that it covered an excessive geographic area.

The lesson for employers:

  • Well-drafted restraints of trade agreements can be important to protect client and customer connections, but courts will not accept lengthy restraints as valid.
  • In recent years, court decisions have been more reluctant to enforce restraints of up to 12 months than has historically been the case.
  • Except in rare cases, employers may be legitimately able to direct an employee not to work.

 

Peter Vitale is the principal of CCI Victoria Legal

 

Read more on employment agreements

 

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