Four Year Restraint Deemed Enforceable

In an important decision the Victorian Supreme Court has found a four year restraint period to be reasonable and enforceable against a former key employee of an IT company.

The Court has ordered the IT specialist be restrained from working for a competitor business and soliciting other employees of Southern Cross to join him at his new employer for the entire four year restraint period until June 2020.

One of the key reasons behind the lengthy restraint being upheld was due to the fact that in June 2016 the IT specialist sold his 40 percent share in Southern Cross for $3.5 million as part of a share sale agreement.

In exchange for selling his shares, the IT specialist also agreed to remain with Southern Cross as an employee. However, whilst working for Southern Cross during the restraint, he also commenced employment with a competitor business of Southern Cross, Blue Connections Pty Ltd on a one day per week basis and $5,000 per month in salary.

Restraints reasonable

On the question as to whether the restraint was reasonable, Justice Michael McDonald emphasised the IT specialist had received a large amount of financial consideration in exchange for his entry into the restraint and stated “there is nothing exceptional in a four year restraint in the context of a goodwill case where the vendor receives a substantial amount of consideration”.

Further, His Honour also relied on the fact the IT specialist continued to receive a salary from Southern Cross as an employee after the sale of his shares and therefore determined the four year restraint against the IT specialist was reasonable in the circumstances.

Restraints excessive

His Honour also concluded the meaning of ‘restricted business’ and ‘business’ under the share sale agreement’s definitions was confined to IT procurement and associated IT managed services.  His Honour stated “a competing business will only be a restricted business if it is engaged in activities which are the same as those undertaken by Southern Cross as at 28 June 2016” which in this case covered the activities the IT specialist was undertaking at his new employer.

Conclusion

Effective and well drafted restraint clauses can be enforced particularly if they are connected to a sale of business scenario.

As demonstrated in this case, financial considerations paid to employees in exchange for entry into a restraint will be a key factor in a Court’s decision in determining the enforceability of a restraint.

It is important to ensure best practice drafting and tailored restraint clauses are prepared in order to best protect your business.  Contact our Employment, Safety and Migration team to learn more about how we can help protect your business.

This article was written by Christina Tsakiris, Senior Associate – Employment, Safety and Migration.