The government does not want to stop your ex-employees from working in their chosen trade or profession. Irrespective of what you put in your Employment Contract:
- a financial planner can continue to be a financial planner: see Entello v Firooztash [2016] QDC 50)
- an accountant can continue to work as an accountant, do tax returns and audits
- an electrician can continue to be an electrician
Steal the client list?
But stealing your clients, suppliers and confidential systems is a different story. In your Employment Contract, you can stop your employee from stealing your goodwill. This is just as you can stop them from stealing the furniture in your office.
However, the non-solicitation restraint, in the Employment Contract, has to be reasonable. This is for both:
- time (after they leave you); and
- the area, such as ‘100 kilometres’ of where they worked.
Have a look at our Sample Employment Contract on how we deal with this issue of both ‘time’ and ‘area’. We put it in stages, so, if the court thought the ‘time’ restraint was too long, then the court could enforce a shorter period. If you didn’t do this then the court may not enforce any ‘time’ at all.
Restraints must be in Employment Contract – and be correctly drafted
In Entello Pty Ltd v Firooztash, the old employer had to go to court to enforce a six-month non-solicitation restraint against his ex-employee. Instead, had the employer built the Employment Contract on our law practice’s website he would have had the 6-month restraint built into the Employment Contact. Only lawyers provide:
- legal professional privilege
- responsibility as a law firm
- legal advice as you build the employment contract
- our signed letter explaining the employment contract
The Court has broadened the concept of ‘solicit’ in favour of the old employer. Our Employment Contracts adopt this new broader definition.
‘Solicit’ is now interpreted differently
The Court stated that ‘solicit’ means ‘to ask for business’. That is not new. What about if your old employee does not telephone or email your clients? In other words, the ex-employee does not expressly ask the client to come and join him. The ex-employee may not have approached the client at all – it may be the client approaching your ex-employee.
The ex-employee is still ‘soliciting’ that is ‘asking for business’ if he gives the impression of wanting the client. It is still soliciting if there is any encouragement. This is new law and highly beneficial to the employer. This is provided that they have an up-to-date Employment Contact – such as the one you can build on our legal firm’s website.
In our view, it is clearly ‘solicitation’ if the adviser is approached by the client and asks ‘how can I move to your new business’ and the adviser answers with ‘I can’t give you one, but all you need to do is sign a letter of appointment’.
Former employee is not allowed to use your confidential information
Your employee has confidential information. Including:
- customer list
- systems
- pricing and pricing policies
- marketing plans
- trade secrets
- Policies and Procedures
- client and customer lists – pregnant with valuable information such as their age, address and emails
- personal relationships with your customers, clients and staff
Such confidential information is a rich source of wealth for the outgoing employee. Armed with the confidential information, the employee starts moving the goodwill out of your business into their hands.
A Legal Consolidated Employment Contract contractually seeks to restrain the former employee. This is from joining a competitor or interfering with key relationships with clients, customers, suppliers and staff.
Finance broker restrained under an Australia employment contract
A restraint over an employee is considered in Liberty Financial Pty Ltd v Jugovic [2021] FCA 607.
A legal prepared restraint is upheld in the Employment Contract. It stops the brazen ex-employee unfairly using the former employees confidential information.
Facts of Liberty Financial Pty Ltd v Jugovic – restraining employees
Liberty Financial lends money. This is for residential, commercial and superannuation funds. It obtains funds to lend to borrowers from investors. As a non-bank lender, it then lends via referrals from mortgage brokers.
Mr Jugovic is a senior manager at Liberty. This is for over 10 years.
Mr Jugovic manages the source of the funding. This is from banks and managed investment schemes.
Orde Financial pops up. It also starts lending money. Its business model is remarkably similar to Liberty’s model.
Mr Jugovic resigns from Liberty Financial.
Liberty Financial did not know that three weeks earlier, Mr Jugovic agrees to work with the new boy on the block, Orde Financial.
Former employer’s argument that the restraint in the Employment Contract should be enforced
Liberty argues that the 12 months’ restraint in the Employment Contract is reasonable. This is because the Employee is a senior manager. He supervises executives. He is responsible for funding relationships. This is on the basis for Liberty’s obtaining funds to lend.
The Employee regularly (weekly and sometimes daily) talks with clients.
Liberty’s fear is that if the basis of lending is known to the Orde Financial then there is great risk that the information provides an unfair head start to the new entrant Orde Financial.
The new employer would quickly raise funding and establish its funding capability. By this means the new employer obtains funding. This harms Liberty’s business.
His Honour found three types of confidential information belonging to Liberty:
- identity clients (lending to Liberty)
- particular terms on which funding is secured from clients
- client investment preferences and risk appetites
On hearing of the deception, Liberty seeks court orders to enforce the restraint in Mr Jugovic’s employment agreement. This is to stop him from taking up employment with a competitor (such as Orde Financial) for one year.
Decision of Liberty Financial Pty Ltd v Jugovic
The Federal Court grants Liberty an interim injunction. This restrains Mr Jugovic from working at Orde Financial.
It is a complete win for the old employer, Liberty.
Feeling sympathy for the innocent Orde Financial?
The Court had no sympathy for Orde Financial. The Court said bad luck. Orde Financial is deprived of Mr Jugovic’s services. This is for one year:
“is the consequence of its [Orde Financial] own decision to take a risk in hiring [Mr Jugovic] in circumstances where I do infer that it was aware of the restraints in his employment agreement with Liberty”.
In other words, Orde Financial knew what was going on. It was complicit.
Justice Beach stated that Mr Jugovic is restrained from employment with Orde. Otherwise, this is a “real risk” that he may “inadvertently or subconsciously” breach his duties of confidence to Liberty.
Justice Beach refers to the:
- “several barriers to entrants” in the non-bank lending market; and
- Mr Jugovic’s key role as head of Liberty’s treasury team
In desperation, Mr Jugovic and Orde give undertakings. They promise that they will not try and steal Liberty’s clients. This is rejected. His Honour states that this fails to answer Liberty’s:
“prima facie entitlement to enforce its [non-compete] restraint, given… it has a strong case for its reasonableness and enforceability”.
The judge also questions how Liberty would find out whether there had been a breach of such an undertaking.
Employees sometime seek out or fabricate breaches by the Employer of the employment contract. This is to try and muddy the waters. Mr Jugovic argues a repudiation of the employment agreement by Liberty. This is on the basis that Liberty had allegedly not paid accrued annual and long service leave entitlements. This was immediately on termination of his employment. Does this mean Mr Jugovic escapes his bosse’s restraint?
Justice Beach held that this argument was underwhelming given the leave entitlements had since been paid by Liberty.
Might Orde Financial sack Mr Jugovic? This is because he can not start working for 12 months. Justice Beach stated the risk of being sack is low.
The challenge to each Employment Contract rests on the specific set of facts. However, a well prepared Legal Consolidated Employment Contract coupled with Employment Policies shows that restraints and restraints of trade are enforceable. This is where there is a strong case that it is reasonable and necessary to protect the employer’s legitimate business interests.
This includes preserving confidentiality of information and stopping the exploitation of personal customer and business connections.
Sure the onus is on the old Employer. But you cannot begin to defend your position unless you have a well drafted restraint clause in your Employment Contract.
Build your Employment Contract here.
Build your Workplace Policies here.
See also:
- Why doesn’t your Employment Contract allow for specific Awards?
- Disaster can happen with no employment termination clause
These cases are incorporated into all Legal Consolidated Employment Contracts regarding non-solicitation clause :
- Amoco Australia v Rocca Bros Motor Engineering Company (1973) 133 CLR 288
- Apollo Shower Screens v Building and Construction Industry Long Service Payments Corporation (1985) 1 NSWLR 561
- Archer v Richard Crookes Constructions (1997) 15 NSWCCR 297 – non-solicitation clause
- Australian Broadcasting Corporation v O’Neill (2006) 227 CLR 57
- Brandi v Mingot (1976) 12 ALR 551 – restaint of trade
- Buckley v Tutty (1971) 125 CLR 353 – employee stealing
- C Medtel P/L v Courtney [2003] FCAFC 151 – employee stealing
- Cadwallader v Bajco [2002] NSWCA 328
- Hellmann Insurance Brokers v Peterson [2003] NSWSC 242 3 – – restaint of trade
- Jardin v Metcash Ltd (2011) 285 ALR 677
- Jones v Dunkel (1959) 101 CLR 298 – employee stealing
- Koops Martin v Reeves [2006] NSWSC 449 – restaint of trade
- Lidner v Murdoch’s Garage (1950) 83 CLR 628
- Payne v Parker [1976] 1 NSWLR 191 – employee stealing
- Pearson v HRX Holdings (2012) 293 ARL 554
- Putsman v Taylor [1927] 1 KB 637
- Sidameneo (No. 456) v Alexandra [2011] NSWCA 418
- Smith v Ryngell [1988] 1 QdR 179
- State Transport Authority v Apex Quarries Ltd [1988] VR 187 – non-solicitation clause
