The Federal Court recently hit what may be a high point for a restraint of trade clause, declaring a two year restraint enforceable against a company's co-founder.
In HRX Holdings Pty Ltd v Pearson  FCA 161 the Court refused to strike out or read-down a two year restraint, and prevented HRX co-founder Brent Pearson from accepting a job with industry rival Talent2 until November 2013.
The case involved HRX Holdings Pty Ltd (HRX), a human resources outsourcing company, which was co-founded in 2005 by Mr Brent Pearson and Ms Katrina Leslie. The business was initially built around the abilities and persona of Mr Pearson, whom the court described as having "quirky brilliance", and whose ability to attract clients was likened to "sprinkling fairy dust".
As Mr Pearson was to play a pivotal role in the business, the issue of his employment contract, and particularly his restraint of trade clause, was the subject of considerable negotiation with his co-founder, Ms Katrina Leslie.
Mr Pearson immediately accepted that a restraint of trade clause was reasonable, and quickly reached agreement with HRX over the extent of activities that the clause should cover. But the parties had difficulty agreeing on the length of the clause. Initially, Mr Pearson suggested that the clause should only last for six months.
Eventually, Mr Pearson agreed to a two year restraint in exchange for an eight percent shareholding in HRX. Additionally, HRX agreed that if it enforced the restraint, it would pay Mr Pearson, for all but the first three months of the restraint period, his average remuneration over the preceding two-year period, reduced by any alternative income Mr Pearson received over the period. Mr Pearson agreed to the proposal despite having legal advice that a two year restraint would be unenforceable.
Mr Pearson resigned as a director of HRX in July 2011, and in September 2011 he resigned his employment entirely to join a competitor, Talent2. HRX sought an injunction from the Federal Court to enforce Mr Pearson's restraint of trade clause and prevent him from taking up the new position.
Decision by the Federal Court
Mr Pearson raised a number of arguments as to why the restraint was unenforceable. These ranged from technical interpretations of the restraint to arguing that the Restraints of Trade Act 1976 (NSW) (Restraints Act) was made inoperable by the Fair Work Act 2009 (Cth) (FW Act).
Buchanan J dismissed all of Mr Pearson's arguments, and in particular, refused to read down the two restraint clause, finding that it was reasonable to restrain Mr Pearson for the entire two year period. In his decision, Buchanan J emphasised the following factors:
- the restraint was separately negotiated and accompanied by specific payments for the period of the restraint
- at the time that Mr Pearson entered into his employment contract, he was the only executive in HRX who had such a payment arrangement
- Mr Pearson had received an eight percent shareholding in exchange for the restraint
- the two year restraint coincided with the average length of HRX's client contracts, meaning that HRX would have an opportunity to renew nearly all of its existing contracts without facing competition from Mr Pearson
- Mr Pearson was obviously central to HRX's business, and intimately familiar with all of its confidential information including its pricing structures, clients and when its client contracts would come up for review.
The Court also found, unsurprisingly, that the FW Act did not make the Restraints Act inoperable. Buchanan J held that under s 27 of the FW Act, the exclusion of state industrial laws did not apply to laws that dealt with "non-excluded" matters, which included "claims for enforcement of contracts of employment". It was noted also that the Restraints Act is not an industrial law in any event.
Implications for employers
A two year restraint is without question, a very long restraint, and not one that would ordinarily be considered enforceable. However, this case demonstrates that even an unusually long restraint can be enforceable if it has been individually tailored to both the business and the individual employee.
The case demonstrates that, when tailoring a restraint clause, businesses should consider:
- crafting the maximum length of the restraint by reference to the normal cycles of the business, such as the average length a project or client contract
- engaging the employee in dialogue about the restraint clause, and ensuring that they have had the opportunity to obtain legal advice on the length and effect of the clause
- for lengthy restraints, providing a discrete payment or bonus in return for agreeing to the restraint.
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