What are the limits of a post-employment restraint clause in an employment contract? Which case won?
Employment contract containing post-employment restraint clause signed by CFO
A large clothing retailer with outlets all over Australia employed a chief financial officer (CFO), based in Victoria. The CFO had worked in finance at a senior level in various industries, including apparel retail, although some considerable time prior to the events giving rise to the litigation.
The CFO started working for the retailer in January 2016. She and the company had negotiated an employment contract which included a clause purporting to restrict her ability to work for the retailer’s competitors after her employment came to an end.
While the CFO’s salary package was substantial (close to half a million dollars per annum), the contract contained a probationary period provision. It was asserted in evidence that this was because while the CFO had previously worked in apparel retail, she had not done so for some time and was instead coming from the health care industry.
CFO resigns to accept employment with competitor
At the start of May 2016, four months after she had started working for the clothing retailer, the CFO tendered her resignation to accept employment with a competitor, another national clothing retail chain. It transpired that the CFO had been in talks with this competitor before resigning.
The CFO’s former employer applied to the Supreme Court of Victoria, seeking declaratory and injunctive orders to prohibit her from working for the competitor during the restraint period.
Wording of the restraint of trade clause
The restraint clause was extensive, but its central provision was as follows.
Restricted Activities – Personal Engagement means directly or indirectly:
(a) being engaged, concerned or interested in;
(b) assisting or advising in respect of;
(c) carrying on any activity:
- which is the same as, or similar to, any part of the specialty brand and fashion business of a Group Company in which you were involved, or in respect of which you received Confidential Information, in the Connection Period; or
- for or on behalf of any of the entities operating the brands listed in Annexure A, their assignees, successors or transmittees (from which, it is acknowledged, BSS and the Group have a legitimate interest in withholding their confidential information and their connections with customers, employees and suppliers).
Annexure A was a list of 50 companies and brands, including the competitor the CFO had decided to join, along with entities such as Target, Kmart, Myer, David Jones and Woolworths.
Cascading provisions in restraint clause
The restraint clause was drafted in line with the current custom of “cascading” provisions. The time length of the restraint was 24 months after leaving employment; or if that were ruled invalid, 18 months; or if that were ruled invalid, 12 months.
In a similar cascading fashion, the geographic area of the restraint was the whole of Australia and New Zealand; or, if that were ruled invalid, Australia; or, if that were ruled invalid, Victoria.
It was up to the court to decide whether the restraint clause should be enforced, or whether it was too broad and therefore invalid.