Two decisions by the Federal Court earlier this year confirm the ability of labour-hire and outsource provider companies to protect revenue streams by relying on non-solicitation restraints to prevent contractors from dealing directly with clients. They also significantly limit a contractor’s ability to seek damages for an ‘unfair contract’ under the Independent Contractors Act 2006 (Cth) (Independent Contractors Act).
What does this mean for labour hire and outsource providers?
- Labour-hire and outsource providers can potentially restrain clients and contractors from dealing directly with each other and cutting the labour-hire or outsource provider out of the commercial relationship. This is because the courts have recognised that labour-hire and outsource firms have a legitimate interest in protecting the profit made from providing labour to clients.
- However, excessive and unenforceable restraints in client and contractor agreements may render the principal/contractor agreement ‘unfair’ under the Independent Contractors Act , although damages resulting from that unfairness will be limited to any future, but not past, conduct.
- Therefore, labour-hire and outsource providers need to take steps to ensure that non-solicitation restraint clauses are reasonable and go no further than is necessary to protect their business interests (particularly where separate non-solicitation restraints are contained in contractor and client agreements).
The cases in brief
Informax No 1 - enforceability of restraint clauses
In February 2007 a labour-hire firm, Candle Australia Ltd (now called Clarius Group Ltd), placed an IT project manager with Woolworths. The IT project manager provided her services to Woolworths through her company, Informax International Pty Ltd.
Candle’s contract with Informax contained a restraint clause which sought to prevent Informax from contracting directly with Woolworths for six months after the contract was terminated (Informax Restraint).
Candle also had a separate Preferred Supplier Agreement with Woolworths, which contained a non-solicitation clause preventing Woolworths from directly engaging any Candle contractor after they had ceased working for Candle (Woolworths Restraint).
After a series of engagements with Woolworths under the contract between Informax and Candle lasting about 15 months, Informax began providing IT services directly to Woolworths (thereby cutting Candle out of the relationship). When Candle discovered this, it contacted Woolworths and claimed that the new agreement was likely to be in breach of the Woolworths Restraint. Woolworths subsequently terminated its contract with Informax.
Informax commenced proceedings in the Federal Court claiming (among other things) that the Informax Restraint and Woolworths Restraint were invalid. Consequently, the contract between Informax and Candle was ‘unfair’ under the Independent Contractors Act and should be varied so that the restraints could not be enforced. Informax needed to show that both restraints were invalid because the Informax Restraint was not used by Candle directly against it, rather it had sought to enforce the Woolworths Restraint.
In its decision, the Court made two important findings. These were that in relation to:
- the principal/contractor agreement - labour-hire companies have a legitimate business interest in maintaining client connections and protecting against the risk of contractors poaching clients; and
- the principal/client agreement - for the first time in Australian law, a labour-hire company has a legitimate business interest in preventing a client from cutting it out of the commercial relationship (called ‘opportunistic disintermediation’). In doing so, the Court found that because a labour-hire company typically incurs expenses in discovering client opportunities and sourcing and providing labour to those clients, it is entitled to recoup its costs and make a profit. However, the interest only extends to the principal’s right to recoup its expenditure with a profit component for example, once there is sufficient revenue to offset the costs, there will no longer be a protectable interest.
Despite this, the Court found on the facts that both the Informax Restraint and the Woolworths Restraint were unenforceable. This was because Candle had not provided enough evidence to demonstrate a sufficient interest in its customer connection, and it had already recouped its expenditure through revenue received from Woolworths over the 15 month contract with Informax.
The Court accepted that it was unfair for Candle to seek to persuade Woolworths to break up the relationship with Informax in circumstances where the Woolworths restraint was unenforceable. This rendered the contract between Informax and Candle unfair within the meaning of the Independent Contractors Act. The Court made orders varying the contract between Candle and Informax so that Candle could not take any steps to enforce the Woolworths Restraint.
Informax No 2 - the ability to seek damages under the Independent Contractors Act
On the basis of the Court’s order in Informax No 1 to vary the contract, Informax then sought to amend its application to include a claim for damages against Candle. The damages claim related to Candle’s conduct (which took place before the Court’s order) in relying on the Informax Restraint (which the Court ordered was unenforceable).
This required the Court to consider whether the order in Informax No 1 had retrospective effect. Ultimately, the Court found that the Independent Contractors Act prohibited the making of retrospective orders and therefore, Informax could not obtain damages against Candle for past conduct.
The effect of this finding is that a contract can only be amended ‘going forward’ with respect to future conduct. Therefore, a contractor cannot obtain damages as a result of conduct which occurred before the Court makes an order to vary the contract.
What the cases show
The decision in Informax No 1 is to some degree a win for labour-hire and outsource providers. For the first time in Australian law, it recognises that labour-hire companies have a legitimate interest in not being cut out as the ‘middle man’ in the commercial relationship with its clients, and that a restraint clause can protect this interest. However, labour hire companies need to think carefully about how long it will take with each client to recoup its expenditure in sourcing that contract to ensure the restraint period is narrowly drafted.
The decision in Informax No 2 is also good news for principals in that it’s a significant limitation on the ability of contractors to seek redress under the ‘unfair contracts’ provisions of the Independent Contractors Act. In the context of commercial negotiations between contractors and principals, a contract will rarely still be on foot by the time proceedings are issued. This decision means that it is now unlikely that contractors will rely on the Independent Contractors Act to remedy a harsh or unfair contract.
Tips for labour-hire providers
It is common for labour-hire companies to protect their interests by entering into non-solicitation restraints under separate contracts with contractors and clients. To minimise the risk of either restraint being found to be unenforceable, labour-hire companies should:
- seek legal advice to ensure that the restraint goes no further than is reasonably necessary to protect their legitimate interests;
- inform contractors and clients at the outset of any parallel non-solicitation restraint that the company has with the client/contractor; and
- consider the operation of any placement fees charged to clients in conjunction with using restraints against contractors and clients.
Informax International Pty Ltd v Clarius Group Limited  FCA 183 (4 March 2011);
Informax International Pty Ltd v Clarius Group Limited (No 2)  FCA 934 (18 August 2011)