Restraint Unenforceable if Employer in breach

An appeal court has found that restraint of trade provisions in employment contracts are unenforceable if the employer repudiates the contract.

In this instance, an employer paid bonuses to employees each year under an incentive scheme. It exercised discretion in awarding the bonuses, which were based on prescribed mandatory criteria, including employees’ performance and broader economic conditions.

In June last year, the employer told employees it was modifying its incentive scheme and was planning to defer payment of 20% of the annual bonuses and distribute that component over three years.

The employee (an accountant) left the employer following its decision to introduce changes to the incentive scheme.

The accountant's employment contract included a restrictive covenant that provided that he could not offer accounting services to his former employer’s clients with whom he had dealings in the previous 12 months.

The accountant claimed the restraint clause did not survive once he left his employer because the employer repudiated the contract when it failed to comply with its contractual obligations, including paying his bonuses.

He argued this was repudiatory conduct as there was nothing that contractually authorised the employer to withhold a proportion of the bonus.

The employer maintained that it was the parties' intention that its post-employment restraints "survive the termination of the employment in all circumstances, and for any reason."

However, the full court ruled that the post-employment restraint of trade clauses were not enforceable if the contract had ended as a result of the employer's breach or repudiation.

At the heart of the decision was the notion that the employer, having breached a contract and brought it to an end, should not be permitted to rely on the restraint clauses within it, the full court said.

This decision serves as a warning to all employers to carefully consider its obligations under employment contracts prior to making unilateral changes to it.

[Crowe Horwath (Aust) Pty Ltd v Loone [2017] VSCA 181 (7 July 2017)]

Disclaimer: The above summary is not legal advice. Employers should contact NECA Legal (WA) Pty Ltd to discuss contractual obligations on 08 6241 6129 or email necalegalwa@ecawa.org.au