Post Employment Obligations - Part 2

Posted on 14 November 2013

In part one (1) of our blog on post employment obligations we looked at why employer's feel the need to incorporate post employment restraints clauses and the increasingly common inclusion of "cascading clause' in employment contracts.

In our second blog on post employment obligations we analyse the case of HRX Holdings Pty Limited v Pearson and discuss how the Court determines whether a post employment restraint is reasonable and enforceable at law.

Reasonableness of restriction

The Court will look at a range of factors when evaluating whether a restraint clause is reasonable. These factors include the following considerations:

  • whether the employee had access to confidential information that goes beyond mere know how, and is in a position to use that information to the employer's detriment;
  • the nature of the work of the employee being restrained, taking into account the employee's seniority and the employee's role and duties including the level of contact the employee has with clients;
  • whether current staff are being recruited or poached by former colleagues;
  • the interests of the employer including the nature, locations and goodwill of the employer's business and the location of the employer's clients;
  • the scope and duration of the restraint, including the time and area proposed to be covered by the restraint;
  • benefits to the parties from entering the restraint; and
  • the bargaining position of the parties.

Mr Pearson

In the recent case of HRX Holdings Pty Limited v Pearson the Federal Court of Australia reviewed whether a post employment obligation was reasonable. Mr Pearson was HRX Holdings Pty Limited (HRX) Managing Director and signed a contract that had a clause that restrained him from engaging with a business or operation similar to or competing with the business of HRX for a period of two (2) years after termination. Mr Pearson executed the contract and acknowledged that the restraint reasonable as he had:

  • was granted shares in consideration of the restraint;
  • intimate knowledge of inside workings of HRX; and
  • agreed that any a breach of the restraint would be detrimental to HRX's business interests.

In addition, the clause required HRX to continue to pay Mr Pearson for 21 months of the 24 month restraint period. Mr Pearson resigned from HRX and not only accepted a job with a competitor, but encouraged his new employer to poach two (2) executives employed by HRX.

The Court evaluated the evidence in and in his judgment Justice Buchanan considered the following factors in determining an outcome:

  • HRX's policy on post employment restraints;
  • that both parties agreed to the terminology in the clause;
  • the consideration (shares and salary) given to Mr Pearson for accepting the restraint;
  • Legal and accounting advice given to Mr Peardon prior to the agreeing to the restraint;
  • Negotiations held between both parties leading to the execution of employment contract; and
  • Mr Pearson's acknowledgement that restraint was reasonable.

After assessing the above criteria Justice Buchanan found in favour of HRX and ordered that Mr Pearson be restrained from being engaged with the competitor in any capacity during the full term of the restraint period.

If your you need your post employment restraints reviewed in order to ensure that the restraints are reasonable we please contact us.