June 2014

The fight for talent: all is fair in love and war - employment contracts and restraint of trade

Business will fight to recruit and retain talented employees.  As the Chief Justice in Equity of the NSW Supreme Court, observed in Wilson HTM Investment Group Limited & Ors v Pagliaro & Ors [2012] NSWSC 1068:

It must be remembered that in the commercial world many businesses prosper by reason, in part, of their capacity to lure the best and brightest away from their competitors to employment with them. This process has become commercially acceptable with the establishment and growth of employment consultancies, search firms and 'head hunters' targeting employees who have proven track records in their particular fields.

Well, the battle for talent has reared its head again before the courts in the high profile case of Network Ten Pty Ltd v Seven Network (Operations) Ltd [2014] NSWSC 692 (29 May 2014).  In this bulletin, we examine the issues raised by the case in respect of the fight for talent.

Seven v Ten

Mr Stephens worked for Channel Seven as a programmer and was an expert in his field.  Channel Ten made Mr Stephens an offer too good to refuse.  On 6 March 2014, Mr Stephens signed the Ten Agreement and gave notice of resignation to Seven.  Ten announced the signing in the press.  Mr Stephens was to start work with Ten on 9 June 2014 for two years.

Seven wanted to retain Mr Stephens.  Senior executives at Seven pulled out all stops, making an extraordinarily generous offer that persuaded Mr Stephens to "walk away" from the Ten Agreement.  On 10 March 2014, Mr Stephens told Ten he would not be starting employment.  Ten did not accept his decision and sued.

The contract with Ten

It is becoming common to see the employment contract contain devices to assist an employer retain its talent.  The Ten Agreement contained such a clause to keep Mr Stephens:

You agree that during the term of your employment, you will not solicit, encourage or accept any offers of employment from or offers to provide services to any other entity without TEN's prior written consent and if you receive such an offer, you will immediately communicate the existence of the offer and its terms to TEN.

Ten claimed Mr Stephens breached this provision; because he did not tell Ten of Seven's counter offer.  Unfortunately, the obligation to do so only operated "during the term of [his] employment" and his employment had not yet commenced.  This weakness proved fatal to Ten's claim.

Compelling Mr Stephens to work for Ten

The Ten Agreement prevented Mr Stephens working for others.  Ten did not accept Mr Stephens attempt to walk away from the contract and sought to restrain Mr Stephens.

A court will not usually grant an order specifically requiring an employee to work for their employer.  So, Ten argued that the Court could prevent Mr Stephens from working for competitors.  The Court found that such an order would indirectly require him to work for Ten or remain idle; and it would not issue such an injunction.

Interference by Seven in Ten's contract with Mr Stephens?

Ten also argued that Seven had unlawfully interfered with its contract with Mr Stephens by asking him not to start with Ten.  To succeed, Ten needed to show that not only had Mr Stephens breached the contract (which he had not) but also that Seven intended to pressure Mr Stephens to breach the contract.

But for there not (yet) being any breach of the Ten Agreement, it appears the Court would have found that Seven committed the tort of unlawful interference with contractual relations.  Seven knew sufficiently of the Ten Agreement to better its terms.  Seven created a new role for Mr Stephens.  Seven said it would cover "all the legals".  Seven allowed Mr Stephens to withdraw his resignation.  The deal was structured to induce Mr Stephens to walk away from Ten.

Somewhat curiously, the Court said: 

Seven did not merely have "discussions" with Mr Stephens about the situation which confronted it.  It did not simply make an offer for continued employment with Seven.

Seven did more, and its actions were unlawful.  But where the boundary lies between a lawful and an unlawful offer in the fight for talent is unclear.  And what are mere discussions?  Any offers made are inevitably designed to better the terms of any current employment or offer from a competitor.

A battle for another day?

Despite Ten losing its main arguments, the Court declared the Ten Agreement remained operational.  Ten had not accepted Mr Stephens' repudiation of the contract and still required him to perform his obligations.  Should Mr Stephens breach the contract after 9 June 2014 by not starting at Ten, then presumably Ten could sue him for damages if it suffers any loss.

Conclusion

The case highlights the tension between sanctity of contract and the "right" of last reply to counter any offer made by the competitor.  Mr Stephens signed a contract with Ten and he should be kept to his word.  On the other hand, Seven simply wanted to make a last tilt at keeping its employee.

The outcome in the case was, it appears, heavily influenced by the fact that Mr Stephens had just signed a contract with Ten.  The fact Seven made efforts to retain its employee were natural.  However, the lesson is how you go about retaining your employee.  Best efforts are made before the contract is signed.

Against that, a broader question arises:  should the law seek to regulate the battle to recruit and retain talent (assuming there is no misuse of confidential information)?  Why should an employer be prevented from seeking to retain its employee?  If a competitor swoops, can’t the employer defend itself?  Isn't all fair in love and war?

Author: James Mattson



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