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Post employment restraints either side of the Murray – murky territory for employers and employees

We tend to think that the main differences between New South Wales and Victoria concern the trams, ‘hook turns’, and AFL.  When it comes to the business, economics, law, and our fundamental rights, there is a general understanding that the law that governs one Australian should be the law the governs all.

But this is not always how things play out.  And the difference in enforcement of post-employment restraints either side of the Murray river is one of the more interesting examples.  A recent case from the Victorian Supreme Court demonstrated this emphatically.   In Just Group Ltd v Peck [2016] VSC 614, the company brought action against their former CFO, Nicole Peck, to restrain her from joining Cotton-On Group, the company’s main rival.  The court held that their clause restraining Ms Peck was unreasonable, because the restraints were broader than required to protect the company’s legitimate interests.  Despite the fact that the clause was negotiated in good faith between the parties when the Ms Peck joined Just Group, the company were unable to rely upon it.

Both companies operate retail outlets homogenously throughout Australia.  But had the governing law of the contract been New South Wales, there is no question the employee would have been restrained.  How could such a different result be possible?

In New South Wales, the Restraint of Trade Act 1975 (NSW) allows a court to modify a restraint clause if it is unreasonable.  A tiny, technical, and uncontroversial piece of legislation, which has massive impacts on the human rights of workers.  To understand this difference, and how it would have applied in this case, it is important to understand how the common law applies outside New South Wales.  Put simply, a clause purporting to restrain an employee, can do no more than is ‘reasonable’ to protect a legitimate interest of the employer.  If it attempts to do so, then the entire clause is unenforceable, and will fail.

Ms Peck’s contract attempted to stop her for a period of two years from performing ‘any activity’ which was either:

  • The same as, or similar to, any part of the specialty brand and fashion business of a Group Company, in which she was involved or received confidential information about. As CFO of the whole group these companies include Just Jeans, Dotti, Portmans, Jacqui E, Jay Jays, Peter Alexander, and Smiggle.
  • In addition, and alternatively, she would also be unable to work for any of the companies that was specifically listed in Schedule A to the contract. The schedule listed 50 companies, (including Cotton On Group), and covered every major retail apparel company currently operating in the Australian Market.

The effect of either clause, would be to prevent Ms Peck from working in any significant capacity the retail apparel or stationary industry in Australia for a period of 12 months.  The court acknowledged the fierce competition between Cotton on Group and Just Group, and in doing so acknowledged that protecting the inevitable leakage of confidential information in Ms Peck’s position would have been a legitimate interest.  However, both limbs of the clause went much further than was required to protect the legitimate interests of Just Group.  The clauses were therefore unenforceable, and the company was denied relief.cotton1-796x364

Had this taken place in NSW however, the same common law would have applied, but the Restraint of Trade Act 1975 (NSW) would have allowed the court to modify the clause, but also, it effectively allows the court to approach the problem from the opposite direction.  The first question would have been: did the contract adequately restrain the employee from working at Cotton-On Group?  The court would have answered ‘yes’, as either limb would have been easily satisfied.  The second question would then have been: would it have been reasonable, at the time the contract was made, to restrain the employee from this activity?  In Ms Peck’s, a high paid CFO defecting to a direct and crucial competitor, the answer would have also been a resounding ‘yes’.   The legislation would have allowed a New South Wales Court to ignore the elements of the restraint clauses that went beyond that activity.   The legislation, probably unintentionally, therefore permits courts to take a retrospective and contextual approach to reasonableness, rather than a purely prospective, theoretical approach.  This creates vastly different outcomes.  Arguably, it has also led the two state supreme courts to have formed different standards, when applying the overarching common law.

In my view, had this case been brought under New South Wales law, it would have been virtually incontestable, and therefore resolved in the favour of the employer before ever getting to court.  In a supposedly federal economy, in which the business communities of neighbouring states such as New South Wales and Victoria are otherwise neatly aligned, this creates an absurd situation, for both employers and employees alike.

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