THE NSW Supreme Court recently ruled that employment contract clauses are not valid if their sole purpose is to prevent ex-employees competing with their former employer
THE NSW Supreme Court recently ruled that employment contract clauses are not valid if their sole purpose is to prevent ex-employees competing with their former employer.
In Aussie Home Loans v X Inc Services, the Court ruled in favour of a former Aussie Home Loans state manager, John Kolenda, after he went to work for a direct competitor.
Kolenda’s employment contract with Aussie Home Loans stipulated he would not solicit, interfere with or endeavour to entice away any of Aussie Home Loans’ employees or contractors for a period of twelve months after the termination of his employment.
Before that twelve month period ended, however, Kolenda persuaded several of Aussie Home Loans’ contractors to follow him to its competitor.
David Stewart, a partner with Harmers Workplace Lawyers, said the Court first considered whether such a restraint could ever be enforceable.
“The Court decided that it could, but that there would need to be a proper justification for the restraint. If an employee has had access to confidential information about the relations between the employer and its other employees it will be easier to justify a non-solicitation restraint,” he said.
However, in Aussie Home Loans the restraint was not enforceable because it went further than was reasonably necessary to protect the legitimate business interests of the employer.
Stewart said there were a number of reasons for this, pointing out that the geographical area of the restraint was too wide, the period of the restraint was considered too long and the scope of the restraint was too broad.
“It covered people who were employed or engaged by Aussie Home Loans after Kolenda’s employment had ended. Kolenda could not have had any confidential information about Aussie Home Loans’ relationship with such future employees,” Stewart noted.
The Court refused to uphold the restraint and, consequently, Aussie Home Loans was left without an important business protection, he added.
Aussie Home Loans is illustrative of the strict approach taken by Courts in deciding whether to enforce a restraint, Stewart said.
“This is because the law has always been reluctant to uphold agreements which might restrict commerce. This is especially so in agreements that attempt to limit an individual’s right to be employed and so earn a living.”
