Your employee resigns to join your arch rival. You’re not worried because you know you have ‘water tight’ post-employment restraints in the contract of employment. But, if in reacting to the employee’s untimely resignation, you breach the contract and this breach amounts to a repudiation of the contract, then your restraints will be unenforceable. This is why it is very important to ensure your actions, including placing an employee on ‘garden leave’ or taking their mobile phone, are consistent with your rights under the contract.

The recent case of Grace Worldwide (Australia) Pty Limited v Steve Alves [2017] NSWSC 1296 is an example of where the employer got it right.

Background

Mr Alves was a general manager with Grace Worldwide (Australia) Pty Limited (Company) who resigned to become Chief Executive Officer of a ‘direct and major competitor’. The Company placed Mr Alves on garden leave for his three month notice period, and directed him to return all confidential information, intellectual property, his laptop and his mobile phone. (‘Garden leave’ means that Mr Alves was not permitted to attend for work at any Company office, perform any other duties, have any dealings with the Company’s customers, staff or clients, or use or access the Company’s systems.)

Mr Alves argued that such conduct repudiated his employment agreement (Employment Agreement) and that, accordingly, he was no longer bound by a 12 month post-employment restraint which prevented him from joining the competitor.

The right to place an employee on ‘garden leave’ may be implied

There was no express provision in the Employment Agreement permitting the Company to place Mr Alves on garden leave during his notice period. However, the Company argued that this term could be implied because its only obligation was to pay Mr Alves his remuneration, not to provide him with any work.

This argument relied on the well-established common law principle that an employer will only have an obligation to provide an employee with work in certain limited situations. For example, where the maintenance of an employee’s niche skills requires continuing work to keep them current or a significant aspect of the promised remuneration depends on the employer providing the opportunity to earn.[1]

Conversely, Mr Alves argued that this term could not be implied because the Company’s direction to take garden leave precluded him from earning a bonus.

The Court found that Mr Alves would not have been be entitled to a bonus, even if he had worked the three month notice period, because he would not have completed the six month appraisal period required under the Employment Agreement to earn a bonus. More importantly, the Court found that:

Mr Alves’ position is not one that attracts the requirement for Grace to permit Mr Alves to do the work of its Operations Manager. The position is not unique. It represents one of three positions that report to the CEO….. The skills in question are general management skills albeit where the industry knowledge possessed by Mr Alves, or another with his experience, is an immense advantage.

The Court concluded that, as Mr Alves’ position was not one which required the Company to permit him to work, the Company did not repudiate the Employment Agreement by placing him on garden leave.

The direction to return the mobile phone was also not a repudiatory breach

Mr Alves also argued that the Company repudiated the Employment Agreement by demanding that he return the company-supplied mobile telephone which was part of his remuneration package. The Court carefully scrutinised the Company’s mobile phone policy (Policy), noting that:

  • while Mr Alves was contractually entitled to a mobile phone, the Policy made it quite clear that such an entitlement was ‘for work purposes’;
  • as Mr Alves would not be doing any work during his period of garden leave, it was difficult to understand how his continued possession of the mobile phone could have served the Company’s interests or the intent of the Policy; and
  • the Policy made it clear that Mr Alves did not have unlimited private usage of his Company phone.

The Court therefore found that any loss of value to Mr Alves associated with the deprivation of the mobile phone was so minimal that it ‘totally lacked the characteristics required for contractual repudiation’.

Outcome

As the Court found that the Company had not repudiated the Employment Agreement, the post-employment restraints were enforceable. However, the Court also found that the 12-month restraint was more than what was reasonable to protect the Company’s legitimate business interests and, under s 4 of the Restraints of Trade Act 1976, read down this restraint to six months.

Key lessons for employers

  • When drafting employment contracts, particularly for senior employees, always include an express term enabling the employer to place an employee on garden leave, both during notice periods and where the employer wants to stand the employee aside while conducting an investigation – however, in the absence of an express term, there may nonetheless be an implied right to place the employee on garden leave, depending upon the specific facts.
  • A direction to an employee to return Company property, including a lap top and mobile phone, during a notice period could amount to a repudiation of the employment contract – check the wording in the contract and relevant policies before issuing any such direction and, if in doubt, seek advice, particularly where you wish to rely on post-employment restraints.

[1] Wesoky v Village Cinemas International Pty Ltd [2001] FCA 32

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