August 2012 – Update

Don’t restrain, penalise!

It is a well established principle that employers are entitled to impose restraints on their employees post termination to protect the goodwill of their business, however, there have been many challenges in this area for reasons such as poorly drafted documents or overly restrictive provisions.

In the recent decision of Birdanco Nominees Pty Ltd v Money [2012] VSCA 64, the Supreme Court of Victoria Court of Appeals has been asked to review a somewhat novel restraint concept whereby the employee was not restricted from servicing clients of his past employer, however if he did so, he would be obligated to pay damages amounting to 75% of fees charged by the past employer to the client in the last full financial year in which the employer provided services to that client.

In late 2002 at age 19, Mr Money (“the employee”) was offered employment with Bird Cameron (“the employer”) as a trainee accountant and he signed a contract which contained a restraint of trade clause that governed his conduct for 3 years post termination. The restraint did not prohibit Mr Money from working as an accountant nor did it stop him from taking up employment in a competing firm. However, it did provide that Mr Money be liable to pay damages to Bird Cameron where he provides accounting services to clients of Bird Cameron in which he serviced within 3 years of ceasing employment. This restraint was to last for 3 years post termination.

In April 2009, Mr Money resigned from Bird Cameron to take up a part time position with the Szencorp Group, a client of Bird Cameron, and a part time position with a competing accounting firm, Benjamin King Money. At this time, Szencorp Group terminated its retainer with Bird Cameron and engaged Benjamin King Money to provide accounting services.

Whilst there are many decisions which would suggest that a 3 year restraint post employment would be too onerous, in this case, because the restraint doesn’t prevent Mr Money from dealing with clients of Bird Cameron but instead imposes a monetary amount for damages, the Court in this instance has found the approach reasonable and therefore enforceable. On that basis, Mr Money was ordered to pay Bird Cameron $188,000 in damages, plus interest and costs.

Employers need to be able to prove that the restraint is a genuine protection of legitimate business interests, however, this case shows that an employer may be able to demonstrate what their legitimate business interests are by having a harsher ‘penalty’ for a narrower scope of conduct.

Do your contracts adequately protect your legitimate business interests from employees post termination? Contact Nicole or John at Industrial Relations Law for more information on this or any other employment matter.