Earlier this month, the New South Wales Supreme Court in Australia ordered costs against an employer which funded an employee’s defence of restraint proceedings instigated by his former employer.

HRX Pty Ltd v Scott is the latest in a series of legal spats involving human resourcing companies Talent2 and HRX. In this case, HRX employed Scott until January 2012 when he resigned to join a competitor, Talent2. He was an experienced recruiter in the Western Australian market. HRX commenced proceedings against Scott when it became aware that he had started working for Talent2 during his restraint period (i.e. clearly in breach of those restraints) and suitable undertakings were not proffered.

Scott did not have the financial means to defend the claim so Talent2 funded his defence of the proceedings. It wished to continue to employ him and believed that, other than the mere fact of his working for Talent2, he had not breached any continuing obligations owed to HRX.

Talent2 subsequently discovered that Scott’s non-compete restraint period was actually 12 months rather than the 6 he had represented, and that he had wrongfully forwarded work-related information to his personal email account shortly before leaving HRX. Scott claimed that the contract supplied by HRX’s lawyers which showed the 12 month period “might not be real”, and he was sure that his copy, which he “could not find” and had never provided to Talent2, only had a 6 month non-competition restraint period.

As a result, Talent2 withdrew its financial support and invited Scott to resign or be dismissed. Scott admitted to making a “dumb mistake” (you don’t say!), resigned and agreed to the orders sought by HRX.

HRX then sought to recover its costs from Talent2 rather than Scott, presumably because Talent2 had more ability to pay. Although Talent2 was not a party to the proceedings against Scott, HRX relied on section 98 of the Civil Procedure Act 2005 (NSW). This allows costs to be awarded against a non-party in certain circumstances. Similar rules exist in other jurisdictions, so this is not an Australia-specific issue. In this case, the relevant factors for awarding costs were that Talent2 funded and caused the litigation, that it would have derived substantial benefits if Scott were successful (i.e. continuing to employ him) and that it had signalled to HRX that it would stand up to proceedings . However, Talent2 withdrew that support once it became aware that Scott had breached his ongoing obligations.

Chief Justice Bergin held that but for the funding by Talent2, the litigation would not have been necessary. Further she held that it is “incumbent on employers who poach to ensure those employees are not acting in breach of obligations owed to a former employer”.

The lessons for employers are threefold:

  • First, to conduct due diligence when employing new staff, particularly those joining from a competitor. It is important to be aware of any limitations they have in performing their new role during the restraint period and what commercial impact this may have for the business.
  • Second, to ensure that any conduct by the new employer is not viewed as condoning or inducing a breach of contract as that would risk its being joined in any proceedings or, alternatively, as funding proceedings in circumstances that could result in a costs order.
  • Last, to consider adding an express warranty into the new joiner’s contract of employment that he is not bound by any continuing contractual obligations to a former employer which may impinge on his new duties.