HR outsourcing firm has landmark restraint of trade win

by Astrid Wilson06 Sep 2012

Restraint of trade clauses are a contractual headache for employers and HR – frequently when tested by the courts it has been considered to be against public policy to limit a person’s ability to work. Yet a new finding may have turned that notion on its head.

In the case of Pearson v HRX Holdings Pty Ltd & Anor [2012] FCAFC 111, HR outsourcing company HRX sued one of its former founders in order to prevent the individual taking up employment with a competitor. Upon resigning as a company director in July 2011, he advised that in September 2011 he was to take a position rival company Talent2. Following this, HRX applied to the Federal Court for an injunction to enforce its restraint of trade clause and prevent him from commencing the new employment.

HRX held that it had a legitimate and evident interest in preserving customer connections – and that because the former employee’s principal function had been development and retention of its customer base, it would be simple and thereby damaging for him to access and influence HRX’s customers.

Although Pearson had signed a clause that he would agree to a two year restraint of trade, preventing him from accepting a position with a rival company in the industry until November 2013, at the time he also received legal advice that if tested by the courts it would be unenforceable.

According to employment law expert Tim Lethbridge, Partner Kott Gunning Lawyers, the court’s decision in favour of HRX rested on the following key factors:

  • Pearson was active in the establishment and direction of his ex-employer, HRX
  • Pearson was the primary presenter to prospective clients in its endeavour to secure business
  • Although HRX only had clients in Australia and New Zealand, it had tendered for work in other areas and was actively seeking business opportunities outside those jurisdictions
  • The restraint clause was actively negotiated between HRX and Pearson, and Pearson obtained legal advice prior to agreeing to it
  • The restraint clause provided for Pearson’s salary to be paid to him by HRX during all but three months of the restraining period (subject to reduction if Pearson obtained alternative employment during that period); and
  • Pearson was also allocated an 8% shareholding in HRX in consideration of entering into the restraint clause.

Key takeaway

Enforcing a restraint of trade clause can often seem problematic and in this case, the former employee was confident that the clause would be struck out if tested by the courts. Yet the Federal Court decision has highlighted that a restraint of trade clause can and will be enforceable if it has been appropriately tailored to the business and individual employee.

According to Lethbridge, strict restraints of trade can, in some circumstances, be successfully imposed.


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