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Sympathetic courts could face litigation onslaught

Sympathetic courts could face litigation onslaught

Recent court rulings reflect increasing moves to protect employers' interests, says Michael Bracken of TressCox Lawyers._x000D_

Recent court rulings reflect increasing moves to protect employers’ interests, says Michael Bracken of TressCox Lawyers.

A recent NSW Court of Appeal decision has signalled a real change in the direction of the courts in recognising that gardening leave can be enforced when top executives leave their current employers. A stockbroker was recently ordered to pay more than $500,000 in liquidated damages to his employer for breaching the conditions of his employment contract. 

Disputes concerning employment transition are much more prevalent in certain sectors of the economy, particularly in the financial services industry.  I expect to now see a marked increase in litigation as employers move to protect their interests given the Courts now seem more sympathetic.

The current mood of Courts appears to favour enforcing a restraint and to recognise the value of intangible assets of client networks that senior employees may seek to solicit after termination of their employment. In most roles these are of course important, but in the professions these relationships and networks are critical.

In a recent case [Purcell v Tullet Prebon] involving the global stock broking firm Tullet Prebon, the Court enforced a gardening leave provision in a stockbroker’s employment contract. Tullet Prebon was awarded damages following the company’s successful argument that the stockbroker’s actions, following his gardening leave, amounted to a repudiation of his employment contract (an act of termination of the performance of the employment contract).

Finding in the brokerage’s favour, the Court ordered the employee to pay $503,100 in liquidated damages, which represented 50% of his average brokerage multiplied by the number of months remaining under his employment contract. 

The dispute arose after the stockbroker had tendered his resignation eight months into a two-year fixed-term contract after accepting alternative employment with a competitor. Tullet Prebon refused to accept the resignation and successfully applied for an injunction to prevent the stockbroker working for the competitor for six months, resulting in the employee commencing gardening leave on full salary. Once the gardening leave period expired, the company directed the stockbroker to return to work. However, the employee did not follow the company’s direction and the company subsequently sued its employee for damages. 

The Courts are increasingly leaning towards enforcement of post-employment restraint of trade covenants. This represents quite a mood swing of Court opinion, in respect of which senior executives ought to sit up and take note.

There are three key issues that senior executives should be aware of, and plan for, if they are considering a move.  These involve being cautious at the job offer phase. Executives should carefully negotiate any restraints upon entering a new employment contract. They should also check the terms of their contract to assess whether it contains a ‘gardening leave’ provision and the effect of such a provision if it does.

Under a fixed-term contract, an employer may require an employed executive to take gardening leave following notice of termination for the remaining period of the fixed term contract.  In this circumstance, the other terms of the employment contract, which may include restraints, will remain on foot.  Before entering into an employment contract, an individual executive should assess what happens to ownership of their ‘client bank’ upon entry into the employment contract and in the event of termination at a point in the future.

Post-employment restraint has always been a difficult situation of course for employers, but now it looks as if the pendulum may be swinging in their favour to safeguard their client network assets. There are many considerations for an employer when they have a new senior executive joining them or leaving them, especially if they are coming from, or going to a competitor.

The repudiation of an employment contract by an employee does not automatically extinguish all the rights of the employer, and if the relevant employment contract contains a non-solicitation restraint, it may be enforced.

Injunctive relief to enforce a properly tailored restraint clause can be used to stop an employee working with a competitor for a specific timeframe, prevent solicitation of clients, minimise the loss of business and protect ownership of clients.

Well drafted employment contracts including an appropriate garden leave provision, post-employment restraint and a non-solicitation covenant can substantially assist employers in protecting client networks and confidential trade and client information. These should be par for the course at the senior executive level.

It will be interesting to see if there is a take up of litigation now that these recent Court rulings reflect increasing moves to protect employers’ interests. As the economy improves, and churn at the top improves, there are interesting times ahead it will be interesting to see if the current trend continues or if a more buoyant economy drives the pendulum back towards favouring individual executive rights to openly compete for clients.

Michael Bracken is a partner at TressCox Lawyers, specialising in financial services and corporate risk.

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