A recent decision of the Supreme Court of New South Wales is sure to send shivers down the spine of employers who engage new employees with post-employment obligations to their former employer.

What happened?

In the case, a recruitment consultant resigned employment to take an opportunity with a competitor company.  The recruitment consultant was subject to a number of post-employment restraints preventing him from, amongst other activities, working for a competitor for a period of 12 months from the date he ceased employment.  The consultant did not start with the competitor until two months after his employment ceased. 

The consultant’s former employer became aware that he had taken a role with its competitor about six months after he resigned.  They sought undertakings from the consultant and his new employer that he would comply with the restraints. No undertakings were given.,.  By this stage, the consultant’s new employer was aware that the consultant was subject to a restraint, although the duration of the restraint was unclear.

For a period of about three weeks, the consultant’s new employer funded the defence of his case.  They did so as they expected him to be successful in defending the case, and wished to keep employing him.  However, the new employer ultimately formed the view that it was likely that the consultant would not win the case.  As such, the new employer decided it would cease funding the defence of the consultant’s litigation (the costs of which were expected to be in excess of $100,000).  The consultant subsequently resigned from his employment and surrendered to the demands of his former employer.

Of real concern to all employers considering such situations is the decision the former employer took next: to pursue the costs it had expended in enforcing the restraints. 

Instead of applying to have the consultant pay for those costs, it sought an order that the new employer (who had not itself been a party to the litigation) pay those costs.

Critical findings

The Court determined that the new employer should pay the former employer’s legal costs, and the consultant was let off the hook.

In reaching the decision, the Court found that:

  • the new employer had, at least initially, agreed to fund the consultant’s defence;
  • the new employer had been active in the litigation (including in developing the strategy to defend the litigation);
  • the new employer stood to gain if the consultant was successful in defending the litigation; and
  • it appeared that the consultant would not have continued to defend the litigation but for the new employer agreeing to fund his legal costs.

Key lessons for employers

This case demonstrates the importance of ensuring that candidates have fully disclosed any post-employment obligations that they may owe to a former employer before allowing the candidate to take up employment.  A failure to do so can result in a new employer being dragged into litigation commenced by the former employer, or the employer being required to pay the former employer’s legal costs (even if they are not themselves a party to the litigation).

If a candidate owes post-employment obligations to a former employer, the potential new employer should seriously consider taking legal advice about the enforceability of those obligations, and should give serious consideration as to whether it should agree to fund any legal action that may be commenced by a former employer.