The important role of post-employment restriction in protecting an employer’s legitimate business interests has again been highlighted in a recent decision of the NSW Supreme Court.  In the decision, the Court upheld restraint clauses in the employment contracts of a Senior Manager and Sales Employee, finding that a nine-month post-employment restraint was reasonable for the purpose of protecting the employer’s confidential information.

Background

The senior manager and sales employee were employed at a human resources and workplace health and safety service business that operates throughout Australia and New Zealand (the “employer”). The employer’s business included selling software products for small to medium enterprises to manage and automate their human resource’s function.

In his role, the senior manager was exposed to confidential information of the employer, related to the development of its software. His employment contract specifically imposed obligations with respect to the confidential information and set out a post-employment restraint for up to twelve months.

The sales employee’s employment contract included a restraint clause, which included restricting his use of confidential information and restricting him from engaging with competitors of the employer.

The senior manager resigned to work for a competitor software company, who also sells a self‑service HR platform (the “competitor”). The senior manager subsequently recruited the sales employee to the competitor.  The employer sought injunctive relief to enforce the post-employment restraints and to prevent the employees from using the employer’s confidential information.

Outcome

At the time of resigning from the employer, the employees did not provide the employer with sufficient notice. The senior manager gave the employer four weeks’ notice in his letter of termination, despite being contractually obligated to provide three months’ notice.  As a result, his letter of termination did not lawfully terminate his employment contract with the employer. As such, and by going and working for the competitor, the Court held that the senior manager breached his contractual and fiduciary duties.  The Court also found that the sales employee was in breach of his contract, as he was required to provide four-week notice period but only gave the employer two weeks’ notice.

The Court considered the post-employment restriction clauses in the contracts of both employees and found them to be reasonable for a period of nine months.  The employer and competitor were accepted by the Court as competitors for the purpose of the restraint clauses as they had similar products and operated in a similar market of providing HR software to employers.  As a manager, the senior manager was found to be privy to confidential information, particularly since he was involved in the development of the business’s software. It was accepted that there was a high risk that this information could be passed on to the competitor, to the detriment of the employer. The Court held that a nine-month restraint period was reasonable as the confidential information that the senior manager possessed would remain current for that amount of time.

The Court also held that the restraint in the sales employee’s contract was reasonable as he also had access to confidential information in his role. A nine-month restraint period was held to be reasonable for him as it reflected the amount of time that the confidential information would remain current.

The Court also accepted that the senior manager played a role in actively recruiting the sales employee to leave his employment with the employer. The Court also held that the competitor induced both employees to breach their employment contracts, despite being aware of their obligations.

Key takeaways

• Employers have a right to expect that a departing employee will provide the period of notice required by the employment contract. Where an employer is looking to enforce its post-employment restrictions against the departing employer, the employer’s should be careful to ensure that they do not endorse the employee’s shorter notice period, or to otherwise waive the employer’s rights.
• When assessing the reasonableness of post-employment restrictions, it falls to the former employer to demonstrate the legitimate business interests that are being protected by the post-employment restriction. Where the legitimate business interest is the employer’s confidential information, the reasonableness of the restraint period will also be assessed by reference to the period against which that information is likely to remain confidential.
• When recruiting, it’s important that the new employer understands that any acts by the new employer which result in the employee breaching their post-employment restrictions to the employer, are likely to give rise to a finding that the new employer induced the breaches.

Chris Oliver
People + Culture Strategies