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Allens Arthur Robinson

Focus: Workplace Relations – August 2008

In this issue: we look at when garden leave may amount to an unreasonable restraint of trade; enforcing restraints in special services contracts; whether an employer can have a duty to dismiss employees; and penalties for employees who give inadequate notice of resignation.

Garden leave or restraint of trade?

In brief: A period of 'garden leave' imposed on an outgoing employee may amount to an unreasonable restraint of trade. Senior Associate Luke Gattuso and Articled Clerk Hannah Biggins report on a decision of the Victorian Supreme Court.

How does it affect you?

  • Employers wishing to be able to place employees on garden leave during notice periods should expressly provide for this in the employment contract, with specific restraints applying during the term of the employment.
  • Lengthy periods of garden leave may amount to an unreasonable restraint of trade.
  • Employers wishing to impose restraints should ensure that the restraints are reasonable and necessary to protect their legitimate business interests.

Background

Mr Hillard was managing director of BearingPoint Australia Pty Ltd, an information management company. After nine years with BearingPoint, he decided to enter negotiations for employment with a competing business, Deloitte Consulting.

Following further negotiations, and other communications between BearingPoint, Mr Hillard and Deloitte, BearingPoint deemed that Mr Hillard had resigned. BearingPoint instructed Mr Hillard that his employment would cease in 180 days. During this 180-day notice period, Mr Hillard was directed to:

  • have no further 'active client facing' work;
  • have no contact with any BearingPoint clients, prospective clients or employees; and
  • not attend the BearingPoint offices.

Mr Hillard's contract of employment with BearingPoint also contained post-employment restraints for an additional 12 months after the 180-day notice period. These restraints prevented Mr Hillard from performing work for BearingPoint clients, from soliciting orders from BearingPoint clients and from enticing BearingPoint employees to cease employment with BearingPoint.

When Mr Hillard advised BearingPoint that he was going to start work with Deloitte five months before the end of his 180-day notice period, BearingPoint applied to the Victorian Supreme Court1 to prevent Mr Hillard from taking up employment with Deloitte and from approaching BearingPoint clients.

Was there an implied duty to provide work?

Mr Hillard claimed that BearingPoint's direction not to work during his notice period, while still providing him with full remuneration – that is, placing him on 'garden leave' – was a breach of an implied duty that BearingPoint provide him with work.

Justice Habersberger found that, in the absence of an express contractual term, BearingPoint was under no implied duty to provide work for Mr Hillard. This was largely because Mr Hillard's skills and talents, and his remuneration, would not be affected by the garden leave.

Was the period of garden leave an unreasonable restraint of trade?

Mr Hillard also claimed that, even if BearingPoint was not under a duty to provide work for him, the 180 days' garden leave was an unreasonable restraint of trade.

Justice Habersberger summarised the law in the area, that restraints are enforceable only if an employer can demonstrate that they are 'no more than is necessary for the protection of the [ex-employer's] legitimate interests.'

Justice Habersberger emphasised the purpose of notice periods as being to enable the party receiving the notice enough time to make alternative employment arrangements. In this case, BearingPoint had employed a replacement for Mr Hillard within four weeks. Consequently, the 180-day notice period was held to be 'too lengthy' and principally directed towards preventing Mr Hillard from acting in competition with BearingPoint. This was not a legitimate business purpose for imposing a restraint and was found to be unreasonable and unlawful.

Post-employment restraints

Justice Habersberger found that the post-employment restraints were also unlawful. Specifically, it was held that the scope of the restraints and the period of 12 months were unnecessary to protect BearingPoint's legitimate interests.

In contrast, the New South Wales Supreme Court recently found similar post-employment restraints contained in a deed of release for a 30-month period to be lawful2. However, in that case, the employee had received a benefit for agreeing to the restraint provisions and had also received legal advice as to their effect.

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Restraints in special services contracts

In brief: Although the issue has subsequently been resolved by means of a reported $750,000 cash settlement, the recent decision of the New South Wales Supreme Court in Bulldogs Rugby League Club v Williams confirms the right of employers to enforce employee restraints. Lawyer Rima Hor reports.

How does it affect you?

  • An employer can obtain injunctive relief if it reasonably apprehends that an employee intends to breach their employment contract.
  • If the contract is a contract for the provision of 'special services', the promise not to work for a competitor is more likely to be enforced.
  • Restraint of trade clauses must be drafted carefully as courts will not enforce clauses that are too wide or oppressive.

Background

In 2007, Sonny Bill Williams entered into a five-year contract with the Bulldogs Rugby League Club Ltd. Clause 3.1(t) of the contract provided that, by signing the contract, the player agreed to 'not, without the prior written consent of the Club...participate in any football match of any code', save for matches specified elsewhere in the contract.

However, the Bulldogs became aware that Rugby Club Toulonnais SA (the Toulon Rugby Club), a rugby club based in France (and the second defendant), had entered into negotiations with Mr Williams from about June 2008. These negotiations related to Mr Williams representing Toulon Rugby Club in the 2008-09 'Top 14' competition in France. Newspaper reports indicated that Mr Williams had signed a contract with Toulon Rugby Club and also that Mr Williams was to represent Toulon Rugby Club in a trial match on 8 August 2008.

The Bulldogs brought proceedings in the New South Wales Supreme Court3 to obtain, among other things, an injunction to prevent Mr Williams from playing for Toulon Rugby Club.

Decision

The court granted the injunction because it was satisfied there was reasonable cause for the Bulldogs' apprehension that Mr Williams intended to breach the contract by playing rugby for Toulon Rugby Club without the Bulldogs' permission.

In determining whether to grant the injunction, the court also had to consider whether the restraint was reasonable and therefore enforceable.

The court held that the restraint of trade clause, although expressed without geographical limitation, did not extend further than reasonably necessary to protect the interests of the Bulldogs. In reaching this conclusion, the court noted that some of the reasons for the restraint were:

  • to prevent injury to the player;
  • the recruitment strategy of the Bulldogs, which relied heavily on the promotion of Mr Williams; and
  • the 'star attraction' value of Mr Williams.

The court also upheld the longstanding principle that if the contract is for the provision of special services, the promise not to work for a competitor will generally be enforced. The court found that Mr Williams' contract with the Bulldogs was clearly a contract for special services.

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Does an employer have a duty to dismiss employees?

In brief: The Federal Court of Australia has found that an employer is not required to dismiss an employee where the employee has no work and will be in a better financial position if dismissed. Special Counsel Rowan Kelly and Law Graduate Chris Rosario report.

How does it affect you?

  • Where there is a downturn in business, employers may decide to reduce staff. However, if there is a prospect of future work, consideration should be given to whether it is appropriate to maintain the status quo and retain the employees.
  • While there is no positive duty on an employer to dismiss employees where there is a lack of productive work, an employer's conduct may still constitute constructive dismissal, triggering termination entitlements.

Background

Tristar Steering and Suspension Australia Limited experienced a substantial downturn in its manufacturing activity, leaving it with a substantial surplus of employees that had little, or no, meaningful work to perform.

Despite this, Tristar retained the employees on the basis that their skills and experience were suited to other forms of work and there was the potential of future work from overseas joint ventures, thereby disentitling them to severance payments.

The Workplace Ombudsman alleged that:

  • Tristar managed the dismissal of its surplus employees so as to minimise its redundancy obligations under the certified agreement. This meant that a number of long-serving employees, with significant severance entitlements, were not dismissed during the term of the certified agreement; and
  • Tristar's failure to dismiss the employees injured or prejudicially altered the employees' positions and was done in order to prevent the employees benefiting under an industrial instrument, being a prohibited reason under section 793(1)(i) of the Workplace Relations Act 1996 (Cth).
Decision

The Federal Court4 described the employees as 'foot soldiers who were the victim of the wider campaign being conducted by the generals'.

Although Tristar was genuine in seeking other work, the terms of the certified agreement were a factor in deciding how many employees to retain and who they should be. However, by choosing not to dismiss the employees, Tristar simply maintained the status quo. This did not injure or prejudicially alter the position of the employees.

Consequently, Tristar was entitled to retain the employees to carry out the actual or potential work.

Additionally, it was found that:

  • none of the employees were under a positive obligation to stay, and voluntary redundancy was still an option for most, if not all, of them. Any psychological damage they suffered as a result of remaining employed with Tristar was primarily caused by their decision to stay, not Tristar's passive act of retaining their employment; and
  • Tristar's selection process was not made for any reason associated with union membership or activity. Rather, in deciding who to dismiss, the length of the employees' service was taken into account, as this had a direct correlation to the size of the severance payment that would have to be made.

The Federal Court reaffirmed that a decision that may affect an employee or a class of employees does not, generally, unlawfully discriminate or victimise employees if it is taken for a sound business reason.

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Penalties for employees' lack of notice

In brief: Employers may obtain penalty orders against employees who give inadequate notice of resignation in breach of a collective agreement. Partner Jamie Wells and Law Graduate Will Brennan report.

How does it affect you?

  • Employees must give the minimum period of notice of resignation required by an applicable collective agreement.
  • If an employee fails to do so, an employer can enforce the agreement and seek a penalty under the Workplace Relations Act 1996 (Cth).
  • The amount of the penalty will usually depend on whether the employer suffered financial loss, or the employee profited, because of the inadequate notice. However, a penalty may be imposed even where the consequences of their conduct is minimal, to reflect the breach of the collective agreement.
  • Despite the traditional difficulty in enforcing notice obligations under employment contracts, penalties for breach of collective agreements offer some disincentive to employees resigning without giving proper notice.

Background

Ms Leiminer was employed by Griffith University as a lecturer. In May 2007, she received a job offer from Southern Cross University (SCU) and resigned from Griffith immediately, giving approximately seven weeks' notice.

Griffith refused to accept Ms Leiminer's resignation on the grounds that the Griffith University Academic Staff Union Collective Agreement (the collective agreement) required employees to give six months' notice of resignation unless Griffith consented to a shorter period. Griffith did not consent to a shorter period in Ms Leiminer's case, claiming:

  • her services were required until the end of the second semester; and
  • her absence would require other teaching staff to assume unreasonable workloads.

Griffith applied to the Federal Magistrates Court for an order that Ms Leiminer pay a penalty under the Workplace Relations Act 1996 (Cth) for breaching the collective agreement.5 Ms Leiminer admitted the breach and the court was asked to determine the appropriate penalty.

The decision

The court considered the following factors in determining the penalty:

  • the notice given by Ms Leiminer was much less than the collective agreement stipulated, but more than other universities required;
  • while Ms Leiminer was unaware of the notice requirements when she commenced employment, she was well aware of them at the time she resigned;
  • Griffith could not quantify any financial loss resulting from Ms Leiminer's resignation, because the costs of replacing her for the second semester were actually lower than if she had served the six-month notice period;
  • Ms Leiminer's conduct was deliberate but not malicious;
  • Ms Leiminer had tried to facilitate a smooth transition after her departure, and had made an offer to settle; and
  • in taking up the SCU role, Ms Leiminer had forfeited leave entitlements, meaning the net 'profit' to her resulting from her inadequate notice was only $71.

The court held that the appropriate penalty should reflect the profit gained, plus an amount to account for the breach. Upon a balancing of the factors list above, and recognising that Ms Leiminer's breach was wilful, the court held the appropriate penalty was $500.

It is often difficult for an employer to quantify damage resulting from an employee's failure to honour an obligation to give adequate notice. Courts will rarely, if ever, force an employee to serve the contractual notice period. However, this decision shows that penalties may be imposed, even where the loss to the employer, or profit to the breaching employee, is slight or not easily quantified.

Footnotes
  1. BearingPoint Australia Pty Ltd v Robert Hillard [2008] VSC 115.
  2. Genesys Wealth Advisers Ltd v Miles [2008] NSWSC 802.
  3. Bulldogs Rugby League Club Ltd & anor v Williams & ors [2008] NSWSC 822 (8 August 2008).
  4. Unsworth v Tristar Steering and Suspension Australia Limited [2008] FCA 1224.
  5. Griffith University v Leiminer [2008] FMCA 1045.

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