Departing employees - longer restraint periods being enforced

Articles Written by Jan Dransfield (Partner), Polina Churilova

A 3 year non-solicitation clause with a liquidated damages provision has been enforced against a former employee of an accounting firm on appeal to the Supreme Court of Victoria. The decision highlights the enforceability of restraint clauses against relatively junior employees who are given the opportunity to develop "continuing or recurring" relationships with clients. It is also a reminder of the need to continually review the scope of employment restraints for executives and other employees.

3 year non-solicitation and liquidated damages clause enforced

Birdanco Nominees Pty Ltd v Money [2012] VSCA 64

On appeal, the Supreme Court of Victoria has enforced a 3 year non-solicitation clause against a former employee of an accounting firm. The Court also upheld a liquidated damages clause that required the employee to pay damages of $188,495.65 to his former employer. The decision demonstrates that Courts are prepared to enforce restraint clauses against relatively junior employees who have an opportunity to develop relationships with clients of a "continuing or recurring kind". The case is a reminder of the need to continually review the scope of employment restraints for executives and other employees.

Background

Mr Liam Money commenced employment with Bird Cameron as a trainee accountant at the age of 19. Over a 6 year period he was promoted to the position of supervising accountant. During his employment, he established a close professional relationship with clients of Bird Cameron, including Szencorp Group (Szencorp).

In 2009 Mr Money resigned to take up part-time employment with Szencorp, which was a major client of Bird Cameron. He also worked part-time with a firm, Benjamin King Money (BKM), which had been set up by his father. He later resigned from Szencorp to work full time for BKM. Following Mr Money's resignation, Szencorp sought quotes for accounting services from both Bird Cameron and BKM. The quote provided by BKM was significantly lower (almost half that of Bird Cameron). Szencorp decided to terminate its retainer with Bird Cameron and retained BKM.

Bird Cameron commenced proceedings against Mr Money to enforce the restraint clause in his employment contract.  The restraint clause provided that for a period of 3 years after his employment ended, if Mr Money provided accounting services to a person who had been a client of Bird Cameron (for whom Mr Money had provided services during the 3 years before his employment ceased) he would be in breach of the clause.  In the event of a breach, Mr Money would pay as liquidated damages a sum equal to 75% of the fees incurred by the client in the last full financial year in which the client had remained a client of Bird Cameron.

Decision on Appeal

At first instance the County Court dismissed the claim against Mr Money on the ground that the restraint was unreasonable and the damages clause could be characterised as a penalty.

On appeal, Robson AJA (with whom Maxwell P and Redlich JA agreed) found that Bird Cameron was entitled to protect the goodwill Mr Money had created for the benefit of the firm during the time that he provided services to its clients. Prior to his resignation Mr Money provided services on a continuing or recurring basis so as to create an element of professional goodwill even though he was not a fully qualified accountant. The Court considered that the practical effect of the clause was not to prevent Mr Money from competing with Bird Cameron or providing services to its clients. Rather the restraint was only limited to those clients for whom he had provided services during the three years prior to his employment ceasing. Further it was open to Mr Money to service those clients provided he paid the relevant damages.

The Court held that the liquidated damages clause, which was tied to 75% of the fees previously earned by Bird Cameron from Szencorp, was not "unconscionable or extravagant". It was a genuine pre-estimate of damages likely to be suffered by Bird Cameron, and was not a penalty. Mr Money was therefore liable to pay over $188,000 in damages, plus interest and his former employer's costs.

12 month non-compete clause enforced

EagleBurgmann Australia Pty Ltd v Ross Grant Leabeater & Anor [2012] NSWSC 573

In another recent decision, the Supreme Court of NSW upheld a one year non-compete restraint imposed on a product manager who engaged in a business "similar to" his ex-employer's. The Court held that the restraint was not an unreasonable protection of the employer's interest given the employee was a "one man band" production manager responsible for development of the employer's customer base. The Court also held that the territorial restriction of the restraint clause related to the business activities of the employer, and not to the location of its clients.

Implications

There now appears the possibility that longer non-solicitation and non-compete restraint periods may be enforced by Courts. However, recent cases continue to reinforce the need to ensure that restraints are no wider than necessary to protect an employer's legitimate business interests. Care is therefore needed to draft appropriate restraint provisions having regard to the circumstances of individual employees. 

Non-solicitation clauses may be enforced against relatively junior employees where those employees have an opportunity to develop relationships of a "continuing and recurring kind". 

For employers in services industries, such as professional services firms, consideration should be given to including liquidated damages clauses in restraints. However, there remains a fine line between a liquidated damages clause that is a genuine pre-estimate of loss, and a clause that may be unenforceable as a penalty.  Also, the inclusion of liquidated damages clauses could preclude an injunction being granted by a Court.

Important Disclaimer: The material contained in this article is comment of a general nature only and is not and nor is it intended to be advice on any specific professional matter. In that the effectiveness or accuracy of any professional advice depends upon the particular circumstances of each case, neither the firm nor any individual author accepts any responsibility whatsoever for any acts or omissions resulting from reliance upon the content of any articles. Before acting on the basis of any material contained in this publication, we recommend that you consult your professional adviser. Liability limited by a scheme approved under Professional Standards Legislation (Australia-wide except in Tasmania).

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