A Vic man will have to pay almost $188,500 to his former employer, after he breached a post-employment clause in his contract that prohibited him from doing business with former clients.
The clause prevented him from providing specified accounting services for three years after his employment finished to any of the accounting firm’s clients to whom he had provided similar services during his final three years of employment. The clause further provided that, if it was breached, the employee had to repay the equivalent of 75% of the fees payable by each client who he approached in the client’s final year with his former employer.
The employee gained employment with a rival firm. A major client of his former firm sought quotes for services from both accounting firms, and when the quote from the new firm was considerably lower, it transferred its business to the employee’s new firm.
The former employer initially took action against the employee in the Victorian County Court, but the court found the terms of the restraint clause to be unreasonable (both its restrictions and the amount payable). However, the Supreme Court found the clause to be reasonable, and overturned that decision on appeal.
The Supreme Court described the restraint clause as ‘relatively narrow’ and said that it did not prevent the employee from practising as an accountant or from ever providing services to any of the former employer’s clients. It only restrained him from having a continuing relationship with the clients he had actually worked for while with the former employer. This restraint included providing different accounting services to the same clients, or providing services in a different employment capacity (see below).
Lack of qualifications and status didn’t matter
The employee had argued that his relatively junior work status should prevent the restraint from having effect. He commenced with the former employer as a trainee, and although later promoted to become a supervising accountant, he had no formal accounting qualifications. He later qualified as an accountant while with his new employer, which, he argued, meant that he was providing different services to the clients.
The employee argued that the clause should be restricted to covering the services of ‘recurring accountancy, tax consulting and special services such as to establish a relationship of client and accountant of a continuing and recurring kind’. In that case, ‘unqualified’ employees such as himself could not be covered by such a clause and it should only apply to professional accountants or tax agents. Otherwise, ‘every employee down to receptionists’ would be ‘providing accounting services’ to clients.
The Court disagreed, stating that the core issue was ‘establishing a client connection’, and no receptionist would be regarded as doing that. The purpose of the restraint clause was to protect the former employer’s goodwill built up by the business relationships. A three-year restraint period was considered reasonable. The Court ordered the man to pay his former employer $188,496 for damages and legal costs.
TIP: Ensure you have a comprehensive risk-mitigating employment contract in place before the new employee commences work with you to cover post employment restraints and other important considerations such as confidentiality and intellectual property.