A former employee has been ordered to pay his previous employer, a major accounting firm, more than AU$188,000 in damages after breaching a post-employment restraint and poaching one of the firm’s top clients.
Background to the Case
Mr Money joined the firm as a trainee accountant in 2003, and although he did not have any formal accounting qualifications, was eventually promoted to the position of supervising accountant.
Mr Money's contract prohibited him, for a three year period after his employment, from providing 'services' to clients he had worked with while employed by the firm. The contract also required Mr Money to pay the firm liquidated damages in the event of a breach.
After Mr Money resigned from the firm in 2009, he commenced part-time employment with a rival accounting practice, as well as part time employment with a major client of his former employer, with whom he had established a close relationship. The rival practice soon began aggressively competing for the client's business, with one quotation shaving a cool AU$70,000 off the old employer's rate. As a result, the client terminated its retainer with Mr Money's former practice and engaged the rival firm.
The ex-employer brought proceedings against the accountant for liquidated damages for breach of the post-employment restraint.
At first instance, the court found the broad nature of the word 'services' meant the restraint could be enlivened by an unreasonably wide range of circumstances and was therefore void. The employer appealed, arguing the word 'services' was limited to the provision of recurring accountancy services and advice. Mr Money submitted the provision should only apply to senior employees.
Overturning the decision at first instance, the Victorian Court of Appeal found the restraint was 'relatively narrow' and the liquidated damages clause was enforceable. Mr Money was ordered to pay his former employer AU$188,495.65 plus interest and legal costs.
The court confirmed settled legal principles that a restraint of trade clause in an employment agreement is prima facie void, and will only be enforceable if the restrictions imposed are reasonable having regard to the legitimate business interests of the employer, as well as to the public interest.
The court found the firm had a legitimate interest in protecting the goodwill which developed with its clients as a result of its employees performing accounting services. Due to the nature of their work, accountants regularly develop relationships of trust and confidence with their clients, the court reasoned.
As to the reasonableness of the post-employment restraint, the court noted that three aspects should be taken into account:
- the nature of the restraint;
- the imposition imposed on the employee; and
- the duration of the restraint.
The court held this particular clause, which lasted for a period of three years, was 'relatively narrow' because it did not prevent Mr Money from practising as an accountant or even providing accounting services to the firm's client base. Rather, the clause was designed to prevent Mr Money from exploiting, after his employment with the firm, the relationships that he had established with its clients. The court rejected Mr Money's argument that the restraint only applied to services supplied by a qualified accountant, and not to trainees or other unqualified persons, such as he was.
Further, the court accepted the liquidated damages clause was a genuine pre-estimate of the damage likely to be suffered by the firm if Mr Money breached the restraint.
How Does It Affect You?
Post-employment restraints, when properly drafted, are a useful means of protecting an employer's client relationships and trade secrets. As this case demonstrates the use of post-employment restraints is not restricted to senior and executive employees but may also be used in contracts with unqualified employees where such an employee will have close contact with clients and develop relationships of trust and confidence with those clients. The inclusion of a liquidated damages clause may also be useful when drafting an employment agreement because it dispenses with the difficulties associated with proving actual loss suffered.