19 September, 2016
Combining restraints and gardening leave to protect confidential information
What you need to know
- Provisions in contracts of employment allowing an employer to direct an employee to commence a period of "gardening leave" can be a means of triggering, or extending, an effective post- employment restraint
- Courts will likely assess the validity of a restraint provision in light of the operation of any "gardening leave" provision in the contract of employment
- Restraint provisions are not designed to protect employers from competition, but are legitimate tools by which to protect and maintain the confidentiality of information, given the difficulty for employers of proving that an employee has breached an obligation not to disclose confidential information
What you need to do
- Review your contracts of employment to ensure they include well drafted provisions dealing with gardening leave, termination of employment, post-employment restraints and confidential information
- Consider using gardening leave provisions, in combination with post-employment restraints, to protect your business for longer
- If a senior employee, who has had access to confidential information, resigns to go to a competitor, prepare evidence as quickly as possible about the role of the employee, and in particular, identify clearly the nature and extent of confidential information that the employee has had access to
- Apply to the court for interlocutory relief as soon as possible, to avoid arguments of delay
- Consider paying the former employee the equivalent of his or her pay for the period of the restraint, to avoid any public policy argument of hardship
Post-employment restraint clauses have been the subject of many judicial decisions. In a decision with significant implications for employers, the Supreme Court of NSW has recently considered the interaction of a post-employment restraint clause with a gardening leave clause.
Contract clauses
In DP World Sydney Ltd v Guy [2016] NSWSC 1072 the employee had entered into a contract of employment with his former employer on 3 July 2014. The employee was employed as General Manager Operations, Port Botany Terminal (the Terminal). The employee's contract of employment contained:
- a "gardening leave" provision, under which the employer could require the employee not to attend for work and not to contact any customers or clients
- a "restraint of trade" provision under which, amongst other things, the employee was not to engage in or prepare to engage in any business or activity that is the same as or similar to any parts of the business of the employer group. This restraint applied across Australia and for three months "starting on the date of termination of your employment"; and
- a "confidentiality" provision under which the employee was required to keep all relevant information confidential.
On 27 April 2016, the employee accepted an offer of employment with a competitor in the position of Terminal Manager, Port Botany AutoStrad Terminal. On 28 April 2016, the employee gave 3 months' notice of termination of employment, consistent with his contract of employment, to take effect on 28 July 2016.
The employer placed Mr Guy on "gardening leave" from 28 April 2016. There followed extensive correspondence from this time onwards between the parties, and their lawyers, in relation to the delivery up of electronic records, or the deletion of them, and other matters. The employee insisted that he would commence employment with the competitor on 29 July 2016 and he proffered certain undertakings.
In July, the employer commenced proceedings in the Supreme Court of NSW, amongst other things, seeking an interlocutory injunction preventing the employee from commencing employment with the competitor on 29 July 2016.
The employee argued that:
- the restraint period commenced from 28 April 2016 when the employer had directed him to commence "gardening leave" because this was the date when the employment terminated. The restraint period did not commence from 28 July 2016, when the contract of employment terminated
- in the alternative, if the restraint period of three months commenced from 28 July 2016, this was not reasonable as between the parties, and was unreasonable in the public interest having regard to the undertakings the employee had proffered; and
- the claim by the employer should be refused because the employer had delayed in bringing the application for an interlocutory injunction.
When did the restraint period start?
Justice White did not accept that the employment relationship terminated when the employer directed the employee to commence "gardening leave". The employee had given three months' notice of termination of his employment consistent with the contract. During that three month period, the employer had required the employee not to attend for work or contact customers or clients under an express provision in the contract, and told him that he was to remain contactable and available for work if required. The employee acknowledged that he would remain available and contactable. Both parties had accepted that the contract (and employment) remained on foot.
In any event, Justice White found that the provision itself stated that the restraint period commenced "on the date of termination of your employment". In another clause, the parties had set out the circumstances in which the employee's employment could be terminated. One of those circumstances included the notice provision under which the employee gave three months' notice of the termination of his employment.
In all the circumstances, the three month restraint period commenced from 28 July 2016, the date of termination of the employment and contract of employment.
Was the restraint valid?
The validity of a restraint is to be assessed at the time the contract of employment was entered into and is to be assessed by reference to what the restraint entitled, or required the parties to do, rather than what they had actually done, or intended to do.
An employer is not entitled to protection from competition. However, because of the difficulty of proving a breach of an obligation not to disclose confidential information, a restraint for a limited period may be justified if it is necessary to protect trade secrets or confidential information.
The employer led evidence that the employee had access to confidential information such as elements of its cost base in operating the Terminal, the actual quantum of those costs and how that compared with budget, the statistical measures used to track throughput and efficiency at the Terminal, and how actual performance compared with budget.
It was also submitted that the employee had attended meetings with clients, and therefore built up a customer connection with the employer's clients.
Justice White said that the validity of the restraint was to be judged in the light of the grant to the employer of the
right to require the employee to go on "gardening leave" for three months before the three month post- employment restraint commenced. In effect, the contract allowed for the employee to be taken out of the market for six months, and that is what happened.
Justice White found that the restraint period of three months, which followed a gardening period of three months (so, a restraint for six months) was reasonable and valid. This was having regard to the seniority of the employee's position, the nature of the employer's business, the small number of competitors operating in the same port as the employer, and, in particular, the confidentiality of the information that the employee would be expected to obtain and use, and which he did acquire.
It was relevant also that the employee acknowledged in the contract of employment that the restraint was reasonable and necessary to protect the employer's legitimate business interests.
Should an interlocutory injunction be granted?
Two tests are applied in order to grant an interlocutory injunction. The first is: is there a serious question to be tried at a full hearing?
For the reasons explained above, Justice White said that not only was there a serious question to be tried that the restraint was valid, but there was a very strong case for saying that it was.
The second test is, where does the balance of convenience lie?
Justice White found that the balance of convenience favoured the granting of the interlocutory injunction.
It was true that the employee had proffered undertakings to keep information confidential, not to solicit or accept an approach from any one of sixteen customers and two suppliers (identified by name) and not to interfere with the relationship between any employer group company and any of their customers, suppliers, group employees or contractors. However, even these undertakings did not displace the balance of convenience in favour of the employer .
This was because a restraint is necessary, or may be necessary, depending on the circumstances and the length of the restraint, to protect the employer from either a witting or an unwitting disclosure of confidential information, having regard to the difficulties an employer faces in attempting to identify or prove any such breach.
The employee raised an issue of hardship. The employee said that if he was not able to commence employment with the competitor from 29 July, he would experience financial hardship and, to a certain extent, would have to live off savings. However, the employer addressed this by offering to pay the employee the equivalent to three month's salary.
Delay
Not approaching the court as early as possible is a very strong discretionary matter to take into account and may lead to an interlocutory injunction being declined.
However, overall, having regard to the strength of the employer's case, the absence of any obvious prejudice to the employee as a result of delay, the absence of any hardship to the employee, and the extent of possibly irrevocable harm that the employer might suffer, Justice White found that an injunction should not be refused on account of delay.
"Even the employee's undertakings (to keep information confidential, not to solicit or accept an approach from any one of sixteen customers and two suppliers and not to interfere with the relationship between any employer group company and any of their customers, suppliers, group employees or contractors) did not displace the balance of convenience in favour of the employer."
MAKING THE CASE: Insights from Geoff Giudice
One interesting aspect of this case concerns the employer's offer to pay the employee the equivalent of salary for the additional three months of the restraint, as well as the three months of gardening leave.
Before enforcing a restraint pending trial, the Court will consider the balance of convenience as between the parties. An important factor to consider is the detriment to each party if the injunction is granted or not. In this case, the Court contrasted the employer's offer to pay the employee the equivalent of salary for the period of the restraint, effectively removing any prejudice to him, with the potential for the employer to suffer irrevocable harm if the restraint was not enforced.
For further information, please contact:
Stephen Nettleton, Partner, Ashurst
stephen.nettleton@ashurst.com
