All questions

Employment law

i Non-competition covenants

Non-competition covenants are permitted and enforceable. However, there are some complexities.

The starting point is that post-employment restraints (whether in the nature of non-competition or non-solicitation covenants) are presumed to be invalid and unenforceable. This is because such restraints are considered to be contrary to public policy: the law does not like to see an individual prohibited from working in his or her lawful trade and generating an income.

The onus falls on employers to demonstrate that, on the basis of its particular circumstances, a restraint is reasonable (having regard to the interests of the employer, the employee and the public), and is no wider than is reasonably necessary to protect the employer's legitimate interests.

There is a large and constantly evolving body of case law that sheds light on when a post-employment restraint is reasonable. Courts will have regard to the nature and extent of the restraint, its geographical reach and its duration. Insofar as the nature of a restraint is concerned, Australian courts are far more reluctant to enforce non-competition covenants than non-solicitation covenants (as to which see below). Non-competition covenants are rarely enforced unless a former employer agrees to compensate his or her former employee for his or her inability to work during the restraint period. This usually involves the former employer paying the former employee a sum equivalent to the amount the former employee would have earned had he or she continued to be employed by the former employer during the relevant period.

Australian courts also retain a broad discretion to decline injunctive relief to enforce a restraint even if the former employer discharges the onus of proving that the restraint is reasonable. The existence and exercise of this discretion can make the task of enforcing post-employment restraints very difficult for employers.

Monetary damages

Non-competition covenants can be enforced by both injunctive relief (temporary and permanent injunctions) and by orders for monetary compensation. Most non-competition covenants spell this out. Sometimes they go further and provide for liquidated damages.

Geographical or time limitations

Two of the factors a court will take into account when considering the reasonableness of a post-employment restraint are its geographical reach and duration. It is important that both go no further than is necessary to protect an employer's legitimate interests. For example, if an employee has only ever worked in Australia, it is unlikely a restraint operating outside Australia would be found to be reasonable.

As far as duration is concerned, the key question is usually how long does a former employer need to replace a departed employee and give that replacement a reasonable opportunity to establish relationships with the former employer's clients, thereby giving the former employer a reasonable opportunity to protect its business. Depending on the circumstances (such as the duties of the employee and the depth of his or her client relationships), this period might be somewhere between three and 12 months. It is rare for post-employment restraints to be upheld for longer periods.

Limitations on competition

Post-employment restraints can only be used to protect an employer's legitimate interests. This requires careful identification of the employer's business and its true competitors. If a restraint extends beyond these parameters, it is unlikely to be found to be reasonable.

Gardening leave provisions

In most cases, a court will take into account a period of gardening leave when assessing the reasonableness of a post-employment restraint. An employer is not likely to be able to extend the duration of a reasonable post-employment restraint by also providing for gardening leave prior to termination of the employment relationship.

Enforceability

If a former employee was the owner (or part-owner) of a business that was acquired by the former employer and the restraint was entered into to protect the former employer's investment in that business, a court will take a much more robust view about enforcing the restraint. This is because the character of the restraint is different. In this context, the restraint is part of a commercial arrangement, as opposed to a simple employment relationship. The commercial benefit derived by the former employee by virtue of the sale of the business to the former employer is a highly relevant factor taken into account in determining the reasonableness of a restraint.

ii Non-solicitation covenantsEnforceability against employees

Courts in Australia are more willing to enforce these types of restraints than pure non-compete restraints. This is because the enforcement of these more limited restraints does not usually deprive employees of the ability to work and earn an income. However, these restraints must still be reasonable and go no further than is necessary to protect former employers' interests. For example, a covenant will usually need to be limited to the non-solicitation of clients with whom a former employee had some dealings before he or she left his or her former employer's employment. A non-solicitation covenant that seeks to preclude solicitation of all the former employer's clients or customers, even those with whom the former employee had no dealings or knowledge, is unlikely to be found to be reasonable.

Monetary damages

The position is the same as that set out above in relation to non-competition covenants.

Limitations on scope

As with non-compete covenants, non-solicitation covenants must also be limited in geographical reach and duration.

iii Repudiation of contract and post-employment restraints

Repudiation is 'conduct which evinces an unwillingness or an inability to render substantial performance of the contract'. Some examples of repudiation in the employment context include where an employer unilaterally reduces an employee's pay or significantly changes his or her responsibilities (e.g., a demotion) without the contractual power to do so. The test for repudiation is an objective one. In the event of a repudiation, the innocent party has the option to either affirm the contract or to accept the repudiation and treat the contract as having come to an end.

If accepted by an employee, an employer's repudiation of an employment contract invalidates post-termination restraints entirely. The principle that post-termination restraints do not survive an employer's repudiatory breach goes back more than 100 years to a UK House of Lords case. It has been followed and applied in the Australian High Court and most recently in the Victorian Court of Appeal.

An employer should therefore take great care when terminating an employee's employment not to do anything that might amount to a repudiation of an employment contract or it may not be able to rely on any post-employment restraints.

iv Termination of executivesEmployment law

There are both contractual and statutory restrictions on an employer's ability to dismiss an executive.

A termination must be carried out in compliance with the requirements of an executive's employment contract. In Australia, most executive contracts provide for termination without cause by an employer simply giving an executive a specified amount of notice or making a payment in lieu of that notice. Notice periods vary from the statutory minimum (which ranges from one to five weeks, depending on the length of service and the age of the employee) to three, six or nine months, or, perhaps, up to 12 months.

Executive contracts also usually contain a provision for termination summarily (i.e., without notice) where an executive has committed an act of serious misconduct. Serious misconduct is not just unsatisfactory performance, but misbehaviour to such an extent that it can be said an executive has demonstrated that he or she is no longer willing to be bound by his or her employment contract.

Under contract law, an employer can dismiss for any reason and does not need to articulate that reason. However, this position has been modified by a number of different statutes at both the state and federal levels. For example, a termination implemented because an executive possesses an attribute protected by one of Australia's many anti-discrimination laws (which cover attributes such as gender, race, religion, sexual orientation, disability and age) would be unlawful. If a discrimination claim is made and upheld, a range of remedies are available to a former employee, including reinstatement and awards of compensation for past and future economic loss, distress and hurt feelings.

There is also a body of federal law that prohibits employers taking adverse action (meaning action that hurts or disadvantages an employee) because an employee possesses or has exercised a workplace right. Workplace rights include:

  1. benefits (such as minimum employment entitlements) and responsibilities (such as health and safety duties) under workplace laws;
  2. the ability to initiate or participate in a process or proceeding under a workplace law; and
  3. the ability to make a complaint or enquiry to a person having the capacity under a workplace law to seek compliance with that law (e.g., to a WorkSafe inspector or an inspector from the Office of the Fair Work Ombudsman).

Contraventions of these laws can attract prosecutions, fines, injunctions and orders for compensation.

Australia also has unfair dismissal laws that prohibit a termination of employment where the termination is harsh, unjust or unreasonable. However, these laws rarely apply to executives.

Release of claims from an executive

Releases cannot be obtained if they in any way restrict an executive's entitlement to make a claim under a statutory workers' compensation scheme that applies to injuries and illnesses caused by work or that relates to an executive's entitlement to the minimum amount of compulsory superannuation contributions.

The validity of a release agreement or deed (like any other agreement) can be challenged on grounds such as duress and unconscionability. For this reason, it would be prudent for an employer to give an employee an opportunity to obtain independent legal advice before asking him or her to sign a release agreement or deed.

Limitations and guidelines

As far as the common law is concerned, an employer and an executive can agree on whatever severance payments they believe are appropriate to their circumstances.

However, where executives are concerned, this position has been modified by provisions in the Corporations Act. These provisions are complicated and contain numerous qualifications and exemptions, but broadly speaking they restrict the payment of termination benefits to directors and, in relation to entities listed on the Australian Stock Exchange (ASX), key management personnel, to 12 months' average base salary, unless that benefit has been approved by the company's shareholders.

There are also some restrictions applying to public companies in relation to the giving of financial benefits (including termination payments) to related parties. Related parties include directors and spouses, and their parents and children.

Additionally, the ASX's Listing Rules prohibit officers of listed entities from being entitled to termination benefits if the value of those benefits, when combined with the benefits payable to other officers of an entity, would exceed 5 per cent of the equity of the entity, unless shareholder approval is obtained.

There are also some provisions in the Fair Work Act 2009 (Cth) that entitle employees (including executives) to certain minimum benefits on termination of employment. These benefits are notice of termination (or payment in lieu) of between one and five weeks (depending on length of service and age of the departing employee); payment of certain accrued but untaken leave entitlements (limited to annual and long-service leave); and severance pay in the event of a redundancy (ranging between four and 16 weeks' pay depending on length of service).

Terminations in connection with a change in control

If an employer is listed on the ASX, it must not allow an officer to receive any termination benefits (or any increase in them) simply because a change has occurred in the shareholding or control of that entity or any of its subsidiaries.

Involuntary termination for good cause

At an executive level, terminations of employment, whether involuntary or voluntary, and whether for good cause or without cause, are not restricted by legislation except to the extent that anti-discrimination and adverse action laws (discussed above) have an impact on this issue.

Leaving aside those statutes, the position in Australia is that executives can be terminated either with or without cause by the employer simply providing the executive with the appropriate period of notice (the amount of which is usually specified in the executive's employment contract) or by making a payment in lieu of that notice. As noted earlier, an employee can also be dismissed summarily (without notice) if the dismissal is for serious misconduct.

Constructive termination

Australian law recognises that employers can behave in such a way that employees (including executives) can feel they have no alternative but to resign. This sort of forced resignation is treated as a dismissal and is referred to as a constructive dismissal.

Severance compensation on transfer of employment connected with a corporate transaction

The statutory redundancy scheme is subject to provisions that can exempt an employer from the obligation to pay severance pay where an offer of suitable alternative employment has been secured.

As noted above, there is a rule applicable to entities listed on the ASX that prohibits payments on a change in control.

Leaving these rules aside, this question is one that is ordinarily dealt with in an executive's contract of employment. That contract can specify when severance compensation is payable, including in circumstances of a change in control.

v Personal liabilityWorkplace health and safety

Federal workplace health and safety laws (which apply in the majority of Australian states) impose a positive obligation on directors; persons who make or participate in making decisions that affect the whole or a substantial part of a business; and persons who have the capacity to affect significantly a company's financial standing to ensure that the employer complies with its obligations under work health and safety laws. This is known as the due diligence requirement. Importantly, an officer who fails to comply with his or her due diligence obligations is exposed to the risk of prosecution and personal liability. This duty can be breached even if there has been no accident or prosecution of the employer.

Employment laws

Under Australia's federal employment laws (which apply to all corporations), a person who is involved in a contravention of a wide range of statutory provisions is deemed to have contravened those provisions him or herself. A person is involved in a contravention if he or she has:

  1. aided, abetted, counselled or procured the contravention;
  2. induced the contravention;
  3. been knowingly concerned in, or a party to, the contravention; or
  4. conspired with others to effect the contravention.

In that event, an individual can be prosecuted just as if he or she had personally committed the contravention. These laws apply to executives.

The types of contraventions covered by these accessorial liability provisions are provisions that:

  1. mandate minimum employment entitlements (such as wages, leave entitlements and termination entitlements);
  2. require compliance with industrial instruments (such as awards and enterprise agreements;
  3. prohibit adverse action (discussed in Section IV.iii); and
  4. prohibit sham contracting – the practice of treating employees as independent contractors.
Insolvency

Many duties are imposed on directors by statute (particularly the Corporations Act), common law and the laws of equity. One duty that should be brought to the attention of foreign executives who become directors of Australian companies is the duty to prevent insolvent trading: failing to prevent a company from incurring a debt when there were reasonable grounds for suspecting the company was insolvent. Breach of this duty is, effectively, a criminal offence that can attract not only substantial fines but also imprisonment.

vi The Banking Executive Accountability Regime

The Banking Executive Accountability Regime (BEAR) came into force on 20 February 2018. The regime is contained in the Treasury Laws Amendment (Banking Executive Accountability and Related Measures) Act 2018 (Cth) which amended the Banking Act 1959 (Cth).

The BEAR imposes a range of obligations on authorised deposit-taking institutions (ADIs) (i.e., banks, building societies, credit unions) and their accountable persons (i.e., senior executives and directors) in an attempt to increase accountability in these organisations for decisions and outcomes.

The BEAR applies to Australian branches of foreign ADIs as well as to Australian ADIs. In the case of large ADIs (assets of A$100 billion or more), the BEAR took effect on 1 July 2018. In the case of medium ADIs (assets of between A$10 billion and A$100 billion) and small ADIs (assets of A$10 billion or less), it took effect on 1 July 2019.

Notably, the BEAR stipulates that an ADI must:

  1. defer a specified portion of any variable remuneration of an accountable person for a specified period (the minimum period typically being four years from the date on which the decision was made to grant the variable remuneration);
  2. have a remuneration policy such that variable remuneration is to be reduced by an amount proportional to any failure to comply with accountability obligations (which may be a reduction to zero);
  3. ensure that the amount of any such reduction is not paid to the accountable person; and
  4. take reasonable steps to ensure that each of its subsidiaries that is not an ADI complies with the above requirements as if the subsidiary were an ADI.

As a result of the recent Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, it has been proposed that BEAR will be replaced by the Financial Accountability Regime (FAR). The Treasury released a Proposal Paper on 22 January 2020, which proposes to extend the remit of BEAR to all APRA-regulated industries and their senior executives. The objectives and essential structure of BEAR will be retained in FAR, but major changes are proposed including:

  1. FAR will be jointly administered by APRA and ASIC;
  2. FAR extends the definition of an 'accountable person' and accountable persons will also be required to take reasonable steps to ensure their entity is compliant with its licensing obligations; and
  3. FAR will introduce civil penalties for accountable persons and increase the maximum penalties that can be imposed on entities.

At present, the implementation of FAR is merely a proposal and no legislation has been drafted or debated.