A recent case in the Federal Court of Australia has found a two-year employment restraint clause to be valid and reasonable. The employee commenced employment in 2005 with a Human Resources strategy and consulting business, giving two months written notice in July 2011 as per an Executive Service Agreement (‘Employment Agreement’). Justice Buchanan heard the employee was considered as extremely important to the business, with the employee’s skills of attracting clients akin to “sprinkling fairy dust”. The employee was “the human face of [the business], who represented [the business] to the customer”. The Employment Agreement was finalised some months after the employee commenced employment, with contention arising over certain terms, including the length of time the restraint clause would cover. The employee originally proposed a six month unpaid period. However the final Employment Agreement was for a term of two years, with all but the first three months paid. The Employment Agreement also included a clause allowing the employer 14 days to decide whether they wanted the restraint to operate. This allowed an opportunity for the employer to assess the businesses ability to provide pay over the period and any potential downturn in trade if the clause was not in operation. The employer elected to enforce the clause.
The employee argued the terms of “Restricted Business” with the phrase “similar to” amounted to an “unlimited global restraint”. However Justice Buchanan disagreed, commenting that it was reasonable and satisfied s 4(1) of the Restraints of Trade Act 1976 (NSW), which states a restraint of trade clause is valid “to the extent to which it is not against public policy”. He found in favour of the two-year restraint period for a number of reasons:
- The restraint clause was negotiated separately, accompanied by specific provisions;
- Owing to the specific provisions, the clause was clearly of "valuable consideration";
- No other executive at the business had a similar arrangement; and
- The two-year period shadowed the businesses cycle whereby clients generally signed two or three year contracts.
Author: Nick Stevens, Principal, Stevens & Associates Lawyers, an AIIA.biz expert and one of the Panel of Expert Bloggers.
This article provides general information only. It is not legal advice, and is not a substitute for legal advice. Specific advice should be sought to take into account your particular circumstances. Stevens & Associates Lawyers is a boutique industrial relations and employment law firm. It has liability limited by a scheme approved under Professional Standards Legislation.