Restraints of trade clauses aim to prevent employees from engaging in the following conduct for a certain period following the termination of their employment:
- soliciting customers, clients and employees from their former employer; or
- being involved in any business that competes or could reasonably be expected to compete with their former employer.
Under common law, the starting point is that restraints of trade clauses are unenforceable but the courts will enforce a restraint of trade clause if it is reasonable in all the circumstances and goes no further than is necessary to protect a legitimate interest. In New South Wales, however, the Restraints of Trade Act 1976 (NSW) states that "A restraint of trade is valid to the extent to which it is not against public policy." This is different from the common law position in that it allows restraints to be valid "to an extent" (for example, only for part of its stated length). The extent to which a restraint is enforceable turns to whether the employer's attempt to restrain the employee's employment is reasonable and necessary to protect the employer's legitimate business interests.
However, a less common circumstance is when two employers agree (as opposed to an agreement between an employer and employee) to not poach each other's employees. Are these terms reasonable and enforceable?
The New South Wales Supreme Court has considered this question in the recent interlocutory decision of Quantum Service and Logistics Pty Ltd v Schenker Australia Pty Ltd [2019] NSWSC 2. Although this case is an interlocutory proceeding, it provides an indication as to what a court may otherwise say on the issues presented.
Quantum and Schenker agree to restrain themselves
Quantum Service and Logistics Pty Ltd and Schenker Australia Pty Ltd entered into a Services Agreement under which Quantum agreed to provide services to a customer of Schenker. The Services Agreement included a six month restraint of trade clause:
"13.13. Solicitation for Employment. The parties agree that neither party and their associated entities, sub-contractors or their employees will employ or approach for employment, the employees or ex-employees of the other party, during the term and until a minimum period of six (6) months following the termination of this agreement."
Quantum's employees carried out the work relevant to the Services Agreement at Schenker's premises. Mr Murugiah was an employee of Quantum and directly responsible for Quantum's operations at Schenker's premises.
Approximately six months after the Services Agreement was entered into, Mr Murugiah sought to end his employment at Quantum and accept a position at Schenker. This lead to Quantum seeking an order from the court that would prevent Schenker from employing Mr Murugiah pursuant to the Restraint.
The Services Agreement did not require Schenker to:
- act in Quantum’s interests; or
- acquire a minimum level of services from Quantum; or
- acquire services exclusively from Quantum.
As a result, Quantum submitted that it was vulnerable to Schenker's ability to engage its employees and undertake the work relevant to the Services Agreement itself. Schenker could do this by, for example, employing Quantum's employees (such as Mr Murugiah). In these circumstances, Quantum submitted that the operation of the Restraint, in the context of Schenker attempt to employ Mr Murugiah, was reasonable because it went no further than is necessary to protect its legitimate business interests. These being Quantum's interests in protecting its confidential information, maintaining its staff connection, and maintaining the stability of its workforce.
Legitimate business interest outweighs possible damage
At the outset, Justice Robb held that the Restraint was prima facie invalid at common law. However, he observed that the Act constitutes a "significant alteration to the common law principles." Was there a legitimate business interest capable of protection?
Justice Robb agreed with Quantum's submission that under the Services Agreement, Quantum was vulnerable to Schenker undertaking the work that Quantum had agreed to perform. Further, he found that Quantum's commercial interests, particularly given its vulnerability under the Services Agreement, outweighed the possible damage to the public interest caused by the Restraint.
Given this, Justice Robb decided that:
"the need for the protection provided by the provision can be justified because of the special circumstances of the sub-contract and Quantum's vulnerable commercial position."
In these circumstances, Justice Robb concluded that there was a prima facie case the Restraint was enforceable and that the balance of convenience favoured Schenker, with the result that Mr Murugiah was restrained from working for Quantum until a final hearing.
Legitimate interests in your restraint?
Justice Robb's approach in Quantum v Schenker suggests that a contract which restrains two employers from poaching each other's employees will be upheld in some circumstances. The Quantum v Schenker decision indicates that such a restraint may be justified when the purpose and effect of the restraint is to protect an employer’s confidential information, staff connection, and stability of its workforce, especially where the employee works in a secondment-like arrangement that makes them vulnerable to poaching.
That said, employers must remember that, as Justice Robb observed in Quantum v Schenker, "each case requires the identification of the legitimate interest, and a consideration of whether the restraint, so far as it applies to the alleged breach, provides reasonable protection for that interest." When drafting a restraint of trade clause, employers must cautiously ensure they are protecting their legitimate interests in a way that is not contrary to the public interest. By exercising this caution, there is scope for employers in some instances to agree with other parties to not poach one another's employees, as demonstrated by the Quantum v Schenker decision.