The Federal Court has recently upheld a two year post-employment restraint against a very senior former employee who had sought to join a direct competitor of the employer in a senior client facing role.

The employee was often perceived as the “co-founder” and “human face” of the company and was considered to have an intimate knowledge of the company’s client relationships, pricing arrangements and strategies to attract and retain clients.

Implications for employers

This case demonstrates that where a senior employee is perceived to be the “human face” of the company and has an intimate knowledge of the business, clients and pricing, a suitably tailored significant post-employment restraint may well be found to be reasonable to protect the employer’s business interests.

To maximise the chances of a restraint being enforceable, this case highlights the importance of:

  • carefully considering the role/proposed role of the employee and tailoring the restraint accordingly;
  • determining what post-employment restraint is reasonable to protect the company’s interests in the particular case being considered;
  • giving the employee the opportunity to seek legal advice; and
  • if possible, providing some form of valuable consideration for the period of the post-employment restraint.  

Background

  • Established in January 2005 by Katrina Leslie, HRX is a human resources outsourcing company offering recruitment process outsourcing and consultancy services, human resources outsourcing and recruitment technology to clients.
  • The employee, Mr Pearson, was engaged as an employee of HRX in February 2005. He was initially employed as managing director and was publicly referred to as the “co-founder” of HRX.
  • Throughout his employment Mr Pearson was expected to, and did, play an integral role in business development:  
  • Mr Pearson had a significant client facing role. He was often the lead presenter to HRX’s prospective clients. Mr Pearson was regarded as having a “very special ability” to connect with prospective clients, gain their trust and convince them of the benefits of engaging HRX. Various witnesses referred to Mr Pearson “sprinkling fairy dust” on clients; and
  • Mr Pearson had access to all of HRX’s confidential information and was involved in the development and application of its pricing and other business models. Mr Pearson had an intimate knowledge of HRX’s client relationships and the strategies it used it used to attempt to retain clients when their contracts were due to expire.  
  • At the time of Mr Pearson’s appointment, there was no written employment contract in place.
  • An executive services agreement was executed by HRX and Mr Pearson in December 2005. The executive services agreement provided that it commenced operation from 14 February 2005 onwards. It contained a two year post-employment restraint.  Mr Pearson was to be paid for 21 months of that two year period and also receive shares.   Mr Pearson had negotiated this restraint with HRX, initially proposing a six month post-employment restraint without pay.  He obtained legal advice at the time.
  • Throughout Mr Pearson’s employment with HRX, he engaged staff on cascading restraints of up to 12 months.  He emailed one prospective employee stating that “the restraint clause is imperative for our business.”  

The dispute between Mr Pearson and HRX

Mr Pearson gave two months’ notice on 29 September 2011 of his resignation and indicated that he would be commencing with a direct competitor, Talent2.

HRX launched proceedings in the Federal Court, seeking to enforce the restraint in Mr Pearson’s contract.

Federal Court’s findings

Justice Buchanan of the Federal Court held that the post-employment restraint was reasonable under common law and the Restraints of Trade Act 1976 (NSW), for the following reasons:

  • HRX had a “well developed policy” of insisting on post-employment restraints;
  • the parties had agreed, without negotiation, on the definition of “restrained business”;
  • there had been considerable negotiation between the parties as to the duration of the post-employment restraint;
  • Mr Pearson was to be paid for 21 months of the two year post-employment restraint and was also to receive 8% of the issued shares in HRX as consideration for the post-employment restraint;
  • Mr Pearson had received legal advice on the post-employment restraint;
  • the two year period of the post-employment restraint “reasonably accommodated” the contractual cycle on which HRX operated, as HRX typically entered into two to three year contracts with its clients;
  • Mr Pearson had a unique and critical position with HRX, being often perceived as the “co-founder” and “human face” of  HRX and having intimate knowledge of HRX’s client relationships, pricing arrangements and client attraction and retention strategies;
  • there was evidence that, while still employed by HRX, Mr Pearson had encouraged two HRX employees to move across to Talent2; and
  • the restraint had been specifically drafted to protect HRX against the very thing that Mr Pearson now wanted to do - join a direct competitor of HRX.  

HRX Holdings Pty Ltd v Pearson [2012] FCA 161