Court upholds contract which stops a former employee from working for two years

The Federal Court has upheld a two-year restraint clause on a former employee by a human resources company, in a decision which shows that employees cannot take restraint clauses lightly.

A former director of HRX Holdings, Brent Pearson, went on appeal to the Federal Court to contest a contract between Pearson and HRX which restrained him from operating or being involved in a human resource outsourcing or consulting business for a period of two years from the date his employment with HRX Holdings ended.

The court heard before Pearson agreed to the contract he had obtained legal advice that a two-year restraint of trade would be unenforceable at law.

After more than seven years at HRX, Pearson resigned in order to join a direct competitor.

The court found the restraint offered “no more than reasonable protection” and was enforceable, particularly given Pearson’s intimate knowledge of and involvement with HRX’s industry contacts, clients, business models and pricing structures.

It looked at the protracted nature of the negotiations for the restraint clause itself, during which time Pearson received legal advice regarding the enforceability of the proposed restraint.

“There is no reason to think that there was any inequality of bargaining power in the negotiations which led to this arrangement,” the court found.

The court also considered that Pearson would continue to receive remuneration for all but three months of the two-year term via a share issue and sale arrangement built into the restraint.

It found the two-year term of the restraint accommodated the renewal cycle for the majority of HRX’s clients, allowing the company an opportunity to secure its existing client base without competition from Pearson.

Charles Power, partner at law firm Holding Redlich, told SmartCompany while a two-year restraint is “a fairly extreme outcome” Pearson was a senior recruiter, “clearly the face of the business” and was paid by HRX for 21 of the 24-month restraint.

“Once you take that into account it is less surprising that it was upheld,” Power says.

“The analysis in the case really reinforces that when you do have someone who in effect cuts out the employer and is the employer and embodies the employer then you have a strong prospect of enforcing a non-compete restraint.”

Power says the case indicates that a restraint of trade clause can now be for a longer period than just three months or six months.

“It’s an interesting trend, it is one of two or three cases in recent times in this area which suggest that it is becoming easier to enforce restraints, particularly in the professional sphere when you are talking about solicitors, doctors, insurance consultants; people who are encouraged by their employer to develop close personal and professional relationships with clients,” he says.

“It is swinging in favour of the employer now… if you are a professional it is quite clear that you can’t take these restraints lightly.”

Katrina Leslie, chairman of HRX, told SmartCompany that HRX had put in place “a very reasonable and generous restraint” to which Pearson had agreed.

“This matter has emphatically been put to rest, first with the Honourable Justice Buchanan enforcing HRX’s two year non-compete clause with Mr Pearson in March this year, and more recently with the Federal Court rejecting Mr Pearson’s appeal,” she said.

“It is unfortunate that this matter had to come before the courts, as we made multiple attempts to resolve this with Mr Pearson. But in the end the legal action was necessary in order to protect the company, its employees, customers and shareholders.

“All we wanted was that HRX’s contractual arrangements with Mr Pearson were upheld and the court ruling vindicates this.”