Could an accounting firm restrain a former employee from doing work for one of its clients? Which case won?
Man signs employment contract containing post-employment “restraint of trade” clause
In 2003, a nineteen-year-old man began employment as a trainee accountant with a major accounting firm in Perth. He signed an employment contract that included a post-employment “restraint of trade” clause.
Restraint of trade clauses are often included by employers to protect their client relationships should an employee leave and start up work in competition.
However, clauses of this nature are not always easy to enforce because the law recognises that it is not in the public interest to restrict a person’s ability to earn a living or to restrict healthy competition between businesses. The onus to prove that a particular restraint clause is “reasonably necessary” to protect “legitimate business interests” therefore rests with the employer.
Restraint clause prevents man from acting for former clients
The clause in this agreement sought to prevent the employee from doing work for any client of the firm if he had provided accounting services to that client at any time in the three years before he left the firm.
If the employee breached this clause, then the contract specified he was to pay liquidated damages to the firm in a sum equal to “75% of the fees incurred by the client” in the last full financial year that the firm had acted for the client.
Employee develops close relationship with client
The employee remained with the firm for over six years, and although he did not obtain professional accounting qualifications during this time, he was eventually promoted to the role of supervising accountant.
The employee dealt directly with clients in his role and formed a close relationship with one client in particular, who he did work for on a recurring basis.
Employee leaves but continues to work for clients
In 2009, while still working part-time at the accounting firm, the employee began to work directly with that client three days per week. Two months later, he resigned from the accounting firm and started working for a rival accounting firm in Perth on the other two days of his working week.
Shortly after, the client sought quotations from the employee’s former and current firms. The client subsequently terminated the retainer with the former firm in favour of the new, rival firm.
The former firm commenced proceedings against the employee for damages for breach of the restraint of trade clause, claiming a sum equivalent to 75% of the fees for the client (and other smaller clients) for the year to 30 June 2009. It was for the court to determine whether the clause in this case was reasonably necessary to protect a legitimate business interest of the former firm.