17 January, 2016
Actrol Parts Pty Ltd v Coppi (No 2) [2015] VSC 694
WHAT YOU NEED TO KNOW
- When a significant employee at any level in an organisation gives notice of resignation, employers have to make important decisions about how to manage the employee's exit and, in doing so, protect their business' interests.
- One option is to place the employee on leave with pay during the notice period (also known as "gardening leave"). This can be a useful strategy because it prevents the employee from taking up employment with a competitor during that period, and also maintains the employee's fundamental obligations of loyalty and fidelity.
- However, gardening leave is not always an available or preferred option: for example, if there is no express right in the employee's contract to put the employee on gardening leave, or if the terms and conditions during gardening leave are less favourable than the existing terms and conditions.
- The recent case of Actrol Parts Pty Ltd v Coppi (No 2) [2015] VSC 694 demonstrates how these risks can arise. The result of that case was that an employer had no remedy against an employee who had resigned and gone to work for a competitor before his notice period would have ended.
- In Actrol, the Court dismissed the employee's argument that his employer could not put him on gardening leave absent an express contractual right to do so, but found by the terms of his gardening leave, the employer had repudiated the contract. At the same time that the company placed the employee on gardening leave, the company took his company car, mobile phone and iPad from him. This, the Court found, was a fundamental breach of the contract.
WHAT YOU NEED TO DO
- Consider whether, and how, employer rights associated with termination of employment are expressly provided for in your company's contracts of employment, particularly the rights to:
- place an employee on gardening leave for all or part of his or her period of notice;
- make a payment in lieu of all or part of an employee's notice period;
- restrain an employee after the employment ends; and
- protect the company's confidential information.
- Avoid conduct that may place the organisation at risk, such as putting an employee on gardening leave when there is no entitlement to do so, or withholding contractual benefits during gardening leave. These actions may breach the contract of employment because they may be considered to be a repudiation of the contract which, if accepted, brings the contract to an end.
- Consider your organisation's information security policies and whether they are effective to prevent confidential information being sent outside your organisation's IT systems.
How effectively do your organisation's contracts of employment protect it when significant employees resign? The loss of significant employees at any level exposes organisations to risks relating to protecting confidential information and the organisation's interests in relation to non-competition and non- solicitation.
Is your organisation protected?
The recent case of Actrol Parts Pty Ltd v Coppi (No 2) [2015] VSC 694 demonstrates these risks and provides a useful reminder for employers of how to manage the exit of a significant employee.
The employee in this case was employed by the company in the role of National Sales Manager. He had been in that role since 2010.
His employment contract gave him various benefits including a company car.
During August 2014, the employee accepted an offer of employment with a competitor company. On 13 August 2014, he gave notice of his resignation to his employer. His contractual notice period was 4 weeks.
Rather than requiring him to attend for work during his notice period, the employer put the employee on "gardening leave". The employee was placed on leave with pay, required to return his company car, iPhone and iPod and was driven home by another employee. Thereafter, the employee was not required to attend for work or perform duties.
On 1 September 2014 (9 days before the expiry of his contractual notice period), the employee commenced employment with his new employer. On 10 September 2014, the former employer commenced legal action against the employee.
Repudiation
Repudiation refers to a breach of contract by one party that is so serious that it entitles the other party to treat the contract as at an end. In the Actrol case, the employee argued that the former employer had repudiated his contract in two ways:
- by putting him on gardening leave when there was no contractual right to do so; and/or
- by taking away his company car, phone and iPad during the period of gardening leave.
The employer argued that it had no express or implied contractual obligation to provide the employee with work during his notice period.
Bell J was prepared to imply a contractual right to place the employee on gardening leave during his limited notice period, but found that the company had repudiated the contract by the manner in which it had done so. Bell J found that the provision of a company car was an essential part of the employee's contract, so that in removing his car the employer had effectively unilaterally reduced the employee's remuneration or interfered with his salary package. Those are matters that the law has long recognised to constitute serious breaches of the employment contract and that will almost always involve repudiation of the contract.
The employee argued, and Bell J accepted, that his act of accepting and commencing employment with the new employer constituted an acceptance of his former employer's repudiation of the contract.
The employer argued that the contract had not come to an end as the employee claimed, because his acceptance of the company's repudiation had never been communicated to it. Bell J did not accept this, noting that an acceptance can be communicated to the other contractual party directly or indirectly. That being the case, the employee was no longer bound by his implied duties of loyalty and fidelity to the employer from the moment that the former employer knew of his new job. On the facts, that occurred one day after the employee started employment in the new job. So, it was found that the employee had breached his duties of loyalty and fidelity to his former employer for one day only. The former employer was not able to prove any damage in respect of that day's employment.
Non-solicitation
The Court also considered allegations that after commencing employment with the new employer, the employee had attempted to solicit an employee of the former employer to join the new employer. The alleged solicitation occurred on 9 September 2014.
Bell J found that there was no evidence to support the allegation and that, in any event, there was no continuing contractual obligation or legal principle that prevented the employee from soliciting employees of his former employer. He could not have breached his duty of loyalty and good faith to the former employer, because that duty ceased to exist once his employment with that employer ceased.
Confidential information
This part of the employer's claim related to a number of emails (and attachments) that the employee had sent from his work email address to his personal email address. The information in the emails included client lists, sales figures and staff leave balances.
All the emails were sent before the employee went on gardening leave. One email, the last, was sent before he had given his notice but after he had accepted employment with the new employer.
A search warrant granted to the employer revealed that none of the emails were forwarded beyond the employee's personal email, and all were deleted after he had read them.
The employer alleged that in sending the emails to himself, the employee had breached his contract of employment and also obligations contained in a separate confidentiality arrangement that had been signed on the same day as the employment contract.
The employee denied sending the emails to himself for illegitimate purposes. He said he had done so because he did not have remote access to the employer's systems set up at home, and it was easier when he was working at home to read documents on his home computer than on his mobile phone or iPad.
The Court accepted that the employee had sent the emails to himself for a legitimate work-related purpose, which was to allow him to work at home.
How to better protect your organisation
Placing an outgoing significant employee on gardening leave can be a useful way to protect your business' interests because it maintains the employee's implied duties of loyalty and fidelity to the business. Those duties only exist during employment, and they are of a much higher order than duties that can be imposed in post-employment restraints.
There is no common law right for an employer to direct an employee not to perform work. The Fair Work Act 2009 is silent on the issue. So, from the employer's perspective, it is best if an employee's contract gives the employer the express option of placing an employee on gardening leave for all or part of the notice period.
There is a real risk associated with placing a person on gardening leave where there is no contractual right to do so. A court may imply an equivalent term into the contract, but it will depend on the facts of the case.
Bell J's reasoning in the Actrol case (despite the fact that his Honour did imply a right on the facts) suggests that courts will not be quick to imply a right to insist on gardening leave, particularly where the notice period is long. This is because, as Bell J identified, the employment context involves particular considerations. One of the things that distinguishes employment from commercial contracts is the human element. Courts have long recognised that there is valuable human dignity in a person being allowed to work.
Placing an employee on gardening leave without an express contractual basis to do so is a risk because it may entitle the employee to accept a repudiation. Once the employee's acceptance of the repudiation is communicated to the employer, the contract is at an end. The employee will cease to be bound by the contract's terms, including the employee's implied duties of loyalty and fidelity towards the employer.
Businesses need to also be aware that there is a "quid pro quo" in gardening leave. For the business to receive the person's loyalty and fidelity, the employee must remain "on the books" as an employee and, critically, must continue to receive all contractual entitlements, such as a company car or technology.
Failure to provide any benefit to an employee which is a valuable contractual entitlement may be a repudiation of the contract, which would free the person from any contractual obligations towards the employer. Absent any specific post-contractual restraint, the employee would be entitled to work for a competitor immediately.
Non-competition and non-solicitation
The common law offers little protection against solicitation of former customers and colleagues unless the solicitation involves disclosure of confidential information. The Actrol case demonstrates that if an employer wants to ensure that outgoing and former employees do not solicit other employees or customers, it is necessary to craft a contractual term to that effect.
In Actrol, the former employer's allegations of solicitation failed because there was no evidence that the employee had tried to solicit a former colleague to join his new company. However, even if there had been sufficient evidence, the former employer would have had no remedy because there was no contractual or other prohibition on the former employee doing so.
This was because at the time the alleged solicitation occurred, the employee was no longer bound by the general implied obligations of loyalty and fidelity, and there was no contractual provision applying after termination to prevent solicitation.
The situation would have been different if the former employee had used or disclosed confidential information. The law imposes a duty on an employee not to misuse even a former employer's confidential information. Employers often seek to obtain further specific contractual protection in relation to confidential information.
Protecting confidential information
While the law generally protects an employer's confidential information from misuse by a current or former employee, it may be necessary for some organisations to consider more specific and prescriptive security policies.
In the Actrol case, the employer had no redress against the employee in relation to the emails because the employee had not breached any contractual term or any policy by sending information outside the employer's IT system to his personal email address. The fact that he had a legitimate business purpose for doing so, and had not otherwise used or misused the emails was sufficient. It did not matter that it was not management's preference that documents be transferred as the employee transferred them.
The case illustrates that to protect against documents being sent outside a company's secure systems (including even for genuine work purposes), it is necessary to have clear policies and procedures in place in relation to IT access and email use.
MAKING THE CASE: Insights from Geoff Giudice
Whether an employer is entitled to send an employee on "gardening leave" when they resign on notice is a question which rarely arises in the courts, probably because most employees are happy to have some paid leave before commencing a new job and the cost of challenging the employer's direction is likely to be prohibitive anyway. The issue only arose in Actrol as part of the employee's defence to the employer's action based on breach of contract. Some important points to emerge from Bell J's decision are:
- where an employee's role involves direct access to confidential information and the notice period is short (only a few weeks), the employer may have a right to send the employee on gardening leave, even where there is no express contractual term permitting it;
- on the other hand, the employer must maintain all of the employee's contractual entitlements, such as private use of a company vehicle, during the period of leave – or risk being in breach of contract; and
- even if the employer is justifiably concerned about potential loss of confidential information, it may not be permissible to demand the return of equipment such as phones and laptops before the employee goes on gardening leave if the employee is contractually entitled to personal as well as business use of the equipment. However, it may be possible to limit the business use of the equipment.
For further information, please contact:
Marie-Claire Foley, Partner, Ashurst
marie-claire.foley@ashurst.com
