Weekly Brief Case Note:

Grace Worldwide (Australia) Pty Limited (CAN 070 345 845) v Steve Alves [2017] NSWSC 1296

Restraints of Trade: When will directions by Employers to departing employees constitute repudiation?

A recent NSW Supreme Court has upheld the validity of an employer’s direction to place a departing employee on gardening leave as well as enforcing a 6 month post-employment non-compete restraint of trade. The judgment confirms that if an employer is careful not to repudiate the employment agreement, it can direct a senior employee to go on gardening leave and return company property at the time of the direction.

Background

The Plaintiff – Grace Worldwide (Company) – provides local and international relocation services, records management services and other ancillary services. They employed the Defendant – Mr Alves – as a National Manager – Quality, Risk and Environment in 2010. This employment was documented in a contract dated 11 January 2010 (Employment Agreement). By 2017 Mr Alves title had changed to be General Manager Operations. He was one of three national managers who reported to the Company’s Managing Director.

On 10 July 2017 Mr Alves gave notice of his resignation to the Company and informed them he would be taking up the CEO position at the Company’s principal competitor. On 24 July 2017, the Company directed Mr Alves to go on gardening leave for the 3 month notice period stipulated in the Employment Agreement (Direction Letter). Mr Alves initially asserted that the Employment Agreement no longer applied to him or, if it did, the Company had repudiated the agreement because they had no right to direct him to go on gardening leave.

At trial Slattery J identified the following issues in dispute:

  • Did the Company repudiate the Employment Agreement by its conduct in sending Mr Alves on garden leave on or about 24 July 2017?
  • Did the Company repudiate the Employment Agreement by requiring Mr Alves to return the mobile phone, which the Company had issued to him?
  • Did any repudiation by the Company absolve Mr Alves from compliance with the post-employment restraints in the Employment Agreement?
  • To what extent were the post-employment restraints in the Employment Agreement valid and reasonable, as not being contrary to the public interest? If not, can they be read down under the Restraints of Trade Act?

Did the Company repudiate the Employment Agreement by its conduct in sending Mr Alves on garden leave on or about 24 July 2017?

There was no express right under the Employment Agreement to direct Mr Alves to take gardening leave. Despite this, the Company argued there was an implied right to do this under the Employment Agreement. This implied right was based on there being no exceptions to the employer’s obligation to pay the agreed remuneration without also permitting the employee to work.

Mr Alves disputed this by claiming there was no right – express or implied – and the Company’s direction to take Gardening Leave repudiated the contract.

Mr Alves argued Gardening Leave could not be implied because the direction deprived him of his contractual opportunity to work and therefore repudiated the Employment Agreement. This argument hinged on Mr Alves’ entitlement to the Company’s bonus scheme.

It became clear at trial that Mr Alves’ bonus scheme was not discretionary and was a remuneration entitlement. But this entitlement was dependent on Mr Alves working a ‘complete six-month appraisal period’. Regardless of whether Mr Alves went on Gardening Leave or worked his 3 month notice period, he would fall short of the required 6 months to gain the entitlement under the bonus scheme. At this point, Mr Alves’ argument against the implied right was ‘gravely weakened’.

In addition to this fact, because Mr Alves position was not unique and the skills required were general management skills, the Company were not required to permit Mr Alves to work and their Gardening Leave direction did not constitute repudiation.

Did the Company repudiate the Employment Agreement by requiring Mr Alves to return the mobile phone, which the Company had issued to him?

Mr Alves argued the requirement to return his mobile phone constituted repudiation of the agreement, stating it was part of his remuneration package.

The Court recognised the employee was entitled to a mobile phone. However this was not an unconditional entitlement, it was subject to the Company’s mobile phone policy where phones would only be issued when there is a ‘sufficient benefit to the company’. The Court was satisfied that there would be no such benefit for the phone when Mr Alves was on gardening leave.

The phone could not be considered a substantial part of the remuneration package either. If Mr Alves was to comply with the mobile phone policy whilst on gardening leave, he would still be required to keep personal calls to a minimum. He did not have unlimited private usage and his limited usage didn’t justify him obtaining a substitute phone. As the Company continued to otherwise pay Mr Alves his full remuneration whilst on garden leave, the phone removal did not equal repudiation. The phone wasn’t even considered an essential term, let alone an intermediate term of the contract.

To what extent were the post-employment restraints in the Employment Agreement valid and reasonable, as not being contrary to the public interest? If not, can they be read down under the Restraints of Trade Act?

Finding that there was no repudiation, the Court then considered the 12 month post-employment restraints in the Employment Agreement. The Company was seeking to enforce restraints prohibiting Mr Alves from:

  1. Soliciting the Company employees to terminate their employment
  2. Soliciting business from the Company customers
  3. Working for a competitor of the Company for the restraint period.

Mr Alves claimed the 12 month restraints were unreasonable and could not be justified for protecting the Company’s legitimate interests. The Court acknowledged that Mr Alves proposed an undertaking to not contact anyone who had been a customer of the Company between April and October 2017 until 9 January 2018. However these undertakings did not adequately deal with Mr Alves’ customer connections, especially those previously obtained during the busier December to January period. Mr Alves’ knowledge also extended to potential customers.

Ultimately, the Court recognised that the Company had interests that needed to be protected. Mr Alves’ new employer was a direct competitor. The Company and the new employer competed in the same industry and Mr Alves had significant client knowledge. However the Court read down the restraint to 6 months instead of 12 months, concluding this was a suitable protection period given the turnover rate of customer relations in the industry. The Court treated the Company’s supplier agreements in the same way. There was no evidence that Mr Alves intended to solicit employees but the Court enforced the restraint as well.

What is the significance of this decision?

  • This decision reinforces the Court’s willingness to enforce post-employment restraints of trade to protect customer connection and confidential information.
  • The decision is also important as it highlights that a Court can find an implied right to direct an employee to go on gardening leave. It also highlights that it is important to maintain an employee’s benefits and remuneration during the garden leave period. In this case, it did not matter that the employee could not work during the notice period as the bonus was not available due to his employment ceasing well before the due date for payment. Similarly, the removal of the work phone was a tool of trade and so did not constitute a repudiation.