- SUPREME COURT UPHOLDS VALIDITY OF A SIX-MONTH RESTRAINT TO PREVENT SENIOR EXECUTIVE COMMENCING EMPLOYMENT WITH COMPETITOR
The Supreme Court of New South Wales recently considered an application for an interlocutory injunction by an employer who sought to prevent an employee commencing employment with a competitor company by relying on a restraint clause in his contract of employment. In upholding the validity of the restraint, the Court held the six-month restraint period was no longer than reasonably necessary, taking into account the seniority of the employee and the legitimate interest of the employer in preserving its confidential information.
Factual Background. The first defendant, Mr Guy, was employed by the plaintiff, DP World Sydney Ltd, a port and supply chain operator ("DPW"), as its General Manager of Operations. On 28 April 2016, pursuant to the termination clause in his employment contract, Mr Guy gave notice that he had accepted a position with a competitor company and tendered his resignation. In accordance with the termination clause, Mr Guy was required to stay at home during the three-month notice period ("gardening leave") but remain contactable and available to work. Mr Guy was informed that he would remain an employee until the notice period had elapsed and termination of his employment was effective (on 28 July 2016). Thereafter, the post-employment restraint would commence for a period of three months. In response, Mr Guy argued that the gardening leave should count toward the three-month restraint period, so that he was entitled to commence employment with the competitor company on 29 July 2016 (and intended to do so).
DPW sought an interlocutory injunction to restrain Mr Guy from commencing employment with the competitor until 27 October 2016. In opposing the injunction, Mr Guy argued that: (i) the restraint period commenced on the date of notice (28 April 2016) as this was the date the employment relationship was terminated; and (ii) even if the proper commencement date was 28 July 2016, a six-month restraint period (comprising three months of gardening leave and the three-month restraint period) was not reasonable and not in the public interest and was therefore invalid.
Legal Background. The employment contract contained a termination clause (clause 17) that provided for termination in various circumstances, including by an employee giving three months' notice. The contract also contained a restraint of trade clause (clause 19). Under clause 19.4, "restraint period" was defined as "the period of three months starting on the date of termination of your employment".
Under the common law, in order for a restraint to be enforced, it must be: (i) reasonable, having regard to the interests of the parties; and (ii) not unreasonable in the public interest. A restraint of trade is "reasonable" if the employer has a legitimate protectable interest and the restraint does no more than is reasonably necessary for the protection of that interest. A "legitimate protectable interest" may include an interest in trade secrets, confidential information, goodwill and customer connections.
Decision. In relation to the restraint period commencement date, the Court held that placing Mr Guy on gardening leave (under clause 17) did not have the effect of terminating the employment relationship. It was clear that the employment relationship subsisted throughout the notice period, as neither party had repudiated the contract and both acknowledged ongoing rights and obligations under it (such as Mr Guy's obligation to remain available for work).
The Court also held that the reference to the "date of termination" in clause 19.4 referred to the date that the employment relationship and the contract came to an end. As a matter of interpretation, the parties would have intended "termination" to be limited to a termination pursuant to clause 17. Therefore, clause 19 operated in conjunction with clause 17, and this effectively produced a six-month restraint period. Further, Mr Guy could not have avoided the operation of the notice period (and expedited the restraint period) by unilaterally repudiating the contract, as this would give the contract a commercially nonsensical operation. For these reasons, the Court held that the restraint period commenced on 28 July 2016.
In relation to the validity of the six-month restraint, the Court first considered whether the restraint was reasonable by examining Mr Guy's responsibilities in his role. It found that Mr Guy occupied a senior position and would have been privy to information relating to DPW's operating costs, throughput and efficiency, client contracts (including which contracts were due to expire) and development and expansion plans. Mr Guy was also responsible for data relating to revenue, labour costs, overheads and EBITDA. Such information would be very valuable to a competitor, as there were only a limited number of stevedoring operations in the same terminal. The Court held that this information went well beyond the development of an employee's skills, or general or specific industry knowledge, but rather amounted to confidential information and trade secrets. Further, on the balance of convenience (and in balancing the risk of injustice), the case heavily favoured DPW. Any financial hardship caused by the injunction would be mitigated by DPW's offer to pay Mr Guy an amount equal to three months' salary.
In support of the restraint's validity, the Court took into account the fact that Mr Guy had built up significant customer connections at DPW (through regular client meetings) and was to perform a similar role at the competitor, as well as the fact that his contract contained an acknowledgement that each restriction in clause 19 was reasonable and necessary to protect the company's legitimate business interests.
Thus having regard to Mr Guy's position, the nature of DPW's business, the small number of competitors operating in the market and the confidentiality of the information that Mr Guy was expected to use, the Court held that the six-month restraint was not longer than reasonably necessary to protect the legitimate interests of DPW in preserving its confidential information.
Lessons for Employers. This decision provides further guidance on the factors that courts will consider to be relevant in assessing the validity of a restraint of trade. While a restraint cannot protect against mere competition, it may be justifiable to prevent an employee commencing work with a competitor in order to protect the confidential information and/or trade secrets of the employer. Further, there is no hard and fast rule as to the permissible length of a restraint. In assessing a restraint's validity, courts will strike a balance between (i) the need to protect an employer's confidential information (keeping in mind the difficulties in proving disclosure) and (ii) the public interest in not restraining employees on the basis of skills and knowledge acquired in the course of employment. Though not in itself sufficient, an employer's interest in protecting its customer connections may strengthen the case for a restraint's validity (where there are other legitimate protectable interests at play).
- FAIR WORK COMMISSION RULES THAT REDUNDANCY PAYMENTS MUST TAKE INTO ACCOUNT PRIOR CASUAL EMPLOYMENT IN CERTAIN CIRCUMSTANCES
In a surprising decision that is likely to have far-reaching implications, the Full Bench of the Fair Work Commission ("Commission") has ruled that, in calculating redundancy payments, the employee's period of continuous service must take into account certain periods of prior casual employment. The decision resulted from the Commission's broad interpretation of "continuous service" under section 22 of the FWA, which it held should include not only part-time and full-time employment, but casual employment that is undertaken on a regular and systematic basis (where there is no break between the casual and permanent periods of service).
Factual Background. The employer, Forgacs Engineering Pty Ltd (now Donau Pty Ltd) ("Forgacs"), and its employees were covered by an enterprise agreement ("Agreement"). As part of a large-scale redundancy of workers at its Newcastle shipyard, Forgacs calculated redundancy payments for the relevant workers, some of whom were employed on a permanent basis but had prior contiguous periods of casual service. In calculating their redundancy entitlements, Forgacs counted the prior casual service for the purpose of long service leave, but not for the purpose of calculating notice or severance payments.
By agreement between the parties, the Australian Manufacturing Workers' Union ("AMWU") applied to the Commission for a resolution of the dispute. Commissioner Riordan, at first instance, held that periods of casual service should not be counted as "continuous service". It was relevant to his decision that the Agreement entitled casual workers to a loading to compensate them for the notice and redundancy payment entitlements which attached only to permanent employment. The AMWU appealed the decision to the Full Bench of the Commission.
Decision. The Full Bench of the Commission first examined the Agreement and the relevant provisions of the FWA, noting that the Agreement contained detailed arrangements concerning the transition from casual to permanent employment, thus reflecting an agreed delineation between casual employment and immediately subsequent permanent employment. The Agreement also specified that redundancy payments should be calculated by reference to periods of "continuous service", a term defined in section 22 of the FWA. The Commission observed that, while it might seem contrary to "industrial justice" to allow an employee who has received a casual loading for a period of employment to have the same period counted toward the accrual of severance payments, neither the Agreement nor section 22 of the FWA excluded a period of regular and systematic casual employment from the definition of "service" or "continuous service".
As a result, the Commission held (Commissioner Cambridge dissenting) that, where a worker completes a period of regular and systematic casual employment and immediately thereafter commences permanent employment, the earlier period should be included in the calculation of that worker's years of continuous service. However, this is only the case if there is no break between the period of casual employment and the transition to permanent employment. Thus, it cannot include separate earlier periods of casual employment. The Commission also re-affirmed that employees who are casual employees at the date of termination are not entitled to redundancy payments (under section 123 of the FWA).
In dissent, Commissioner Cambridge disagreed with the majority's interpretation of section 22 of the FWA and claimed it relied upon the absence of particular (exclusionary) words, rather than a proper interpretation of the words themselves. In his view, casual employment, by its very nature, does not count as service and is not intended to attract service-related benefits under the FWA. He gave the example of a casual employee who works one day per week for seven years and then becomes a permanent employee. Under the majority's interpretation, this could amount to regular and systematic employment and thus the employee may be entitled to recognise seven years of service. Commissioner Cambridge also warned that the majority decision could lead to illogical outcomes if other service-related benefits under the National Employment Standards (such as annual leave) which have never been available to casual employees become "retrospectively bestowed on a permanent employee for a period which would not have provided any entitlement for that benefit".
Lessons for Employers. As a result of this decision, employers who have a practice of transitioning casual employees to permanent employment should review their practices carefully and be aware that any future redundancy entitlements may include casual periods of service completed immediately prior to the commencement of permanent employment, at least where that work was done on a regular and systematic basis. This decision has divided many, and some employer associations, including the Australian Industry Group ("AIG"), have expressed their concerns and disappointment.
In a submission to the Commission as part of its four-yearly review of modern awards, the AIG has asked the Commission to reject the majority finding in this decision. In response to calls by union groups that regular casual service should be recognised when calculating termination and redundancy entitlements (as well as other entitlements such as unfair dismissal protection and parental leave), the AIG has noted that it would be unjust to require an employer to provide entitlements based on periods of service for which the employee has already been compensated through casual loading.
The AIG submitted that the Donau ruling was based predominantly on clauses in an enterprise agreement, rather than the National Employment Standards. As a result, it is not relevant to the construction of the statutory provisions in the FWA in respect of whether regular casual service should be recognised in determining access to entitlements. Further, the AIG argued that the majority erred in its finding that the determinative provision was section 22 of the FWA, as that section does not contain an express definition of "continuous service". Instead, it claimed that Commissioner Cambridge's dissenting judgment was consistent with previous authorities.
- ADMINISTRATIVE APPEALS TRIBUNAL OVERTURNS DECISION OF DEPARTMENT OF EMPLOYMENT TO REFUSE ADVANCE TO FORMER EMPLOYEE OF INSOLVENT COMPANY UNDER FAIR ENTITLEMENTS GUARANTEE ACT 2012(CTH)
Factual Background. The applicant, Mr Goodfellow, had been employed by Silverbrook since 2003 as a patent attorney. Under Mr Goodfellow's employment agreement ("Contract"), Silverbrook could assign, novate or transfer rights or obligations under the Contract with Mr Goodfellow's prior written consent. Further, the provisions of the Contract could not be varied except by agreement in writing between the parties.
In mid 2010, Mr Goodfellow took on the role of patent portfolio manager in addition to his existing duties. His salary was renegotiated and he received a pay increase. Around the same period, Priority Matters took over the patent management that had formerly been performed by Silverbrook.
Mr Goodfellow heard rumours that Silverbrook staff were to be transferred to Priority Matters. However, he understood that any transfer would need to be formalised under the terms of his Contract. In 2012, Silverbrook experienced severe financial difficulties. Mr Goodfellow's duties were reduced and he continued to work without pay until April 2013, when he was told that Silverbrook was unable to pay him. Mr Goodfellow resigned on 28 October 2013. A liquidator was appointed to Silverbrook on 16 April 2014.
On 28 October 2014, Mr Goodfellow made a claim for an advance under section 14 of theFair Entitlements Guarantee Act 2012 (Cth) ("FEG Act"). The Secretary, Department of Employment accepted information provided by Silverbrook's insolvency practitioner that Mr Goodfellow was an employee of Priority Matters at the date of his resignation. As a result, the Secretary found that Mr Goodfellow was not eligible for an advance. After seeking internal review (which affirmed the original decision), Mr Goodfellow applied to the Administrative Appeals Tribunal ("Tribunal") for a further review of the decision.
Legal Background. Under the FEG Act, the Commonwealth can pay advances to former employees on account of unpaid employment entitlements in circumstances where their employer has become insolvent or bankrupt.
Under section 10 of the FEG Act, a person is eligible for an advance if: (i) their employment with the employer has ended; (ii) an insolvency event occurs in respect of the employer; and (iii) the end of the employment was due to, or occurred either less than six months before, or on or after, the employer's insolvency and appointment of an insolvency practitioner.
Decision. The Secretary argued that there was a tacit agreement between Silverbrook and Mr Goodfellow that his employment had been transferred to Priority Matters. In support of this, Silverbrook noted that Mr Goodfellow's payslips were issued by Priority Matters and his PAYG payment summaries also bore the company's name. In addition, a Certificate of Employment provided to Mr Goodfellow for the purpose of refinancing a home loan stated that Mr Goodfellow was employed by Silverbrook until 26 March 2010, and thereafter he transferred to Priority Matters in the same position. Conversely, Mr Goodfellow argued that the only change to his employment was that his payslips began to be issued by Priority Matters from early 2010. However, as he had not received a request for written consent to transfer his employment or vary his contract, he continued to be an employee of Silverbrook.
The Tribunal examined the terms of the Contract between Mr Goodfellow and Silverbrook in order to determine whether the express or implied consent of Mr Goodfellow was obtained to a transfer of his employment and whether a further contract had been formed with Priority Matters. It held that for Mr Goodfellow to be an employee of Priority Matters, his Contract with Silverbrook must have been terminated and a new contract formed with Priority Matters, or the existing Agreement must have been varied to substitute Priority Matters as his employer. The Tribunal found no evidence that either had occurred.
As a result, the Tribunal held that the Contract was not terminated prior to Mr Goodfellow's resignation. Further, there was no evidence indicating that Mr Goodfellow had expressly or impliedly consented to a transfer of his employment or variation of his Contract. Thus, the Tribunal concluded that Mr Goodfellow had been an employee of Silverbrook less than six months before the appointment of the liquidator and was thus eligible for an advance under the FEG Act.
Lessons for Employers. Employers should be cognisant of the terms contained in employment contracts that govern variation and transfer of employment. Especially in circumstances where related entities become involved in parts of an employer's business, it is important that there is clarity around the precise identity of the employer and whether a valid transfer or variation has occurred. Depending on the precise terms of the employment contract, this may require the execution of a new employment contract by the employee and new employer.