What is reasonable and enforceable when dealing with post-employment restraint clauses?
Overview
In the recent case of McMurchy v Employsure Pty Ltd; Kumaran v Employsure Pty Ltd [2022] NSWCA 201, the Court of Appeal of New South Wales upheld a decision that a 6 month post-employment restraint was reasonable and enforceable against an employee who joined a competitor business, along with restrictions on the employee’s conduct during employment.
Post-employment restraints, also known as non-compete clauses, are provisions contained in employment contracts which seek to restrict an employee from conduct such as competing with the employer after the termination of their employment. Restraint provisions usually involve restrictions within a specific geographical area, a period of time or defined industries or businesses. Generally, post-employment restraints are void as against public policy unless it can be shown that the clause is reasonably necessary to protect a legitimate business interest of the employer, and enforcement would not be contrary to public interest.
This case provides great guidance and authority as to the requirements surrounding post-employment restraints and when they can be relied on from an employer’s perspective.
Background Facts
The facts involve two former employees (the Appellants) of Employsure, which is in the business of providing human resources and workplace health and safety consultancy services throughout Australia and New Zealand.
Mr McMurchy began employment in January 2015 as a sales manager with Employsure. With effect from 1 April 2018, Mr McMurchy was promoted to the role of Outbound Sales Manager. The other appellant employee, Mr Kumaran began employment in February 2018 in an entry level sales position before receiving two promotions to the position of ‘Business Sales Partner’ by November 2019. Both of the Appellants’ employment contracts contained a post-employment restraint clause which read as follows:
20.1 The Employee agrees not to carry on or be engaged, concerned or interested, directly or indirectly, in any capacity specified in paragraph (a) below, in any business or activity specified in paragraphs (b) to (d) below, within any area specified in paragraph (c) below for any period specified in paragraph (f) below:
a) As…Employee…or consultant
b) In any business or prospective business in competition with the Company or Related Body Corporate at the time of termination of employment
…
e) In…
i. Australia;
ii. New South Wales; or
iii. Sydney
f) During the period of…
i. 12 months;
ii. 9 months;
iii. 6 months; or
iv. 3 months.
In December 2020, Mr McMurchy purported to resign from Employsure by giving four weeks’ notice, and was informed by his manager that he was required to provide three months’ notice under the terms of his contract. In response, Mr McMurphy confirmed his position, that his last day of employment would be in January 2021. In January 2021, Employsure’s solicitors wrote to Mr McMurchy to inform him that Employsure was instead terminating his employment on three months’ notice with effect in April 2021, and placing him on ‘gardening leave’ for the three month notice period, during which his employment contract remained binding. He was still being required to remain available during business hours and carry out duties as needed.
Several days before his purported resignation, Mr McMurchy accepted a position at ELMO Software Ltd, a software provider of cloud human resources, payroll and rostering time software which was ultimately found to be a business in competition with Employsure. Before commencing with ELMO in January 2021, and while still employed by Employsure, Mr McMurchy provided ELMO with names of Employsure employees who they could potentially poach. This then led to Mr Kumaran resigning from Employsure and joining ELMO as well.
Consequently, Employsure commenced proceedings seeking injunctions restraining the two employees from working for ELMO. At first instance, it was found that:
Mr McMurchy had breached his contract of employment by giving insufficient notice, and taking up the role with ELMO whilst on gardening leave and before the end of his three-month notice period;
He also breached his contractual and fiduciary duties by inducing Mr Kumaran to leave and join ELMO;
The post-employment restraints for 6 months following the end of Mr McMurchy’s employment, and for 9 months following the end of Mr Kumaran’s employment with Employsure, were reasonable and enforceable; and
ELMO knowingly assisted Mr McMurchy in his breach of his contractual duties.
The injunctions were therefore granted, leading to Mr McMurchy and Mr Kumaran lodging an appeal against this decision.
Decision and Reasoning on Appeal
The Court of Appeal predominantly agreed and upheld the first instance findings, with the main difference being that the 9 month restraint against Mr Kumaran was set aside as being unreasonable.
The Court of Appeal considered that Employsure had legitimate interests to protect, including its confidential information, by preventing Mr McMurchy from working for competitors while still employed and on gardening leave, and for a further period of 6 months from the termination of his employment on 12 April 2021. Mr McMurchy was a senior employee, with significant access to confidential information, and had done “exactly what the covenant restrained” in taking up employment with a competitor. Because of this, the Court of Appeal upheld the first instance finding that a 6-month restraint for Mr McMurchy was reasonable and enforceable in the circumstances. During Mr McMurchy’s employment (including while he was on gardening leave), Employsure also had legitimate interests in ensuring Mr McMurchy was available to devote the whole of his skill, time and attention during business hours to his duties to Employsure.
It was also established that Mr McMurchy had taken an active role in enticing Mr Kumaran to ELMO in breach of his fiduciary duties and his duty of fidelity and good faith to Employsure, and this led to Employsure suffering loss. For this reason, Mr McMurchy is liable to compensate Employsure for the harm he caused it by enticing Mr Kumaran to leave the company, in addition to the liability of ELMO who knowingly assisted or induced this breach.
Mr McMurchy’s appeal was therefore dismissed.
In contrast, Mr Kumaran’s appeal was allowed as it was concluded that the work he performed, and his lack of seniority made it unreasonable for him to be restrained from working for a competitor for 9 months. It was found that Mr Kumaran was significantly unlikely to remember much of the confidential information that he may have been exposed to, such as customer data or dealings, for this long of a period. As a result, the 9 month restraint enforced against him at first instance was set aside. Employsure did not seek the enforcement of a restraint against Mr Kumaran for any shorter period, so the Court did not consider whether Mr Kumaran could nevertheless have been validly retrained for less than 9 months.
Key Takeaways
The outcome of this case demonstrates the well-established principle that post-employment restraint clauses seeking to restrict employees from working for competitors will only be enforceable where it is reasonably necessary to protect the employer’s legitimate business interests.
Clear guidance is provided from a practical sense that restraint clauses are more likely to be enforceable against employees who hold or held a relatively senior position within a business, and which caused them to have access to a significant amount of confidentially sensitive information which has the potential to cause detriment to the employer if misused. The reasonableness of the duration of a restraint against working for a competitor will likely depend on how long the employee has had access to the information and how long it is likely to be remembered and remain of commercial advantage.
This case is also a reminder for both employees and employers of the importance of fiduciary and contractual duties arising from contracts of employment. Employees who encourage and induce another employee to leave their employment for a competitor during their employment may be liable for beach of these duties, while a competitor employer may also be liable where they have knowingly participated or assisted in the breach.
If you require assistance with drafting clauses in an employment contract or advice relating to any issues similar to this case, please contact:
Jim Babalis
Special Counsel
T 03 5225 5205
E jbabalis@ha.legal
Jim Rutherford
Principal Lawyer
T 03 5226 8579
E: jrutherford@ha.legal
Sonia McCabe
Senior Associate
T 03 5226 8558
E: smccabe@ha.legal
Matthew Synoradzki
Graduate Lawyer
T 03 5226 8542
E msynoradzki@ha.legal
