April 2005

Aussie Home Loans Limited v X Inc Services - Unreasonable restraint clause - Open season on poaching?

Bartier Perry acted for the former employees of Aussie Home Loans in this first case in Australia to consider the validity of a non-poaching clause designed to stop ex-employees "soliciting" their former employer's contractors and employees.

When senior executives from Aussie Home Loans left the business and set up a rival company called X Inc, Aussie Home Loans sought an injunction in the Supreme Court to stop the new competitor trying to hire its employees.

The employment contracts of all of the defendants prevented them from soliciting, interfering or endeavouring to entice away any employee or contractor of Aussie for 12 months.

In December 2004 the Supreme Court refused Aussie's application for an injunction because:

  • There was no evidence that the former employees had done anything to breach their employment contracts, and there was no apparent threat of a breach; and also

  • The court was not satisfied that Aussie Home Loans had a reasonably strong chance of enforcing the restraint for the claimed period of 12 months.

The claims were then set down for hearing and on 7 April 2005, His Honour Justice White dismissed Aussie's substantive application. The Court held:

  • A company is able to restrain a former employee from poaching its staff but only in limited circumstances. It is a matter of public interest that employees be entitled to work for whom they choose;

  • The restraint clause relied on by Aussie was for too long a period and unreasonable in its scope and geographic coverage.

Also of interest was the court's finding that when Aussie had transferred some of the employees as part of a restructure to another company, even though employment was on the "same terms and conditions", those words did not transfer the post employment restraint.

Lessons

  • A court will not grant an injunction if there is no evidence of a breach of the restraint or a likely threat.

  • Restraints will only be valid where demonstrably necessary to protect the legitimate interests of a business.

  • That assessment has to be made at the time the restraint is agreed and for that particular employee in their individual position.

  • General coverage clauses aimed at preventing poaching "any employee or contractor" will most likely fail; there is no one-size-fits-all formula of words.

  • Beware of the risks of "transferring" employees and carefully consider your contractual arrangements during corporate restructure.

  • You need to take the time and care if your restraint clauses are to be worth more than the paper they are written on.