Post Employment Restraints – When are they enforceable?

Post employment restraints, at one time almost exclusively limited senior executives agreements, are becoming an increasingly common feature in modern employment agreements. As the inclusion of restraint provisions in employment agreements has grown, so too has the frequency with which we are asked whether these provisions are enforceable.

The starting point, as far as the law is concerned, is that contract terms are meant to be observed. However, regardless of what the parties may have agreed to, Courts will not enforce a restraint on an employee where the restraint is not necessary for the reasonable protection of the legitimate interests of the employer, or anyone else for whom the benefit of the restraint was agreed.

The Supreme Court of NSW recently considered the enforceability of post employment restraints in the highly publicised case of Seven Network (Operations) Limited v James Warburton (No 2) [2011] NSWSC 386.

James Warburton was a senior executive at the Seven network. On 14 July 2008, he signed a 3 year contract with Seven. The contract allowed either party to terminate on 3 months’ notice following the expiry of the initial 3 year term.

In February 2011, Lachlan Murdoch approached Mr Warburton and offered him the role of CEO at  Network Ten. Mr Warburton accepted the offer and on 2 March 2011 informed Seven that would be moving to Ten, effective as at 14 July 2011. Seven immediately placed him on gardening leave and prevented him from accessing Seven’s premises, clients and staff.

Seven sought to restrain Mr Warburton from joining Ten for a period of 12 months starting from his final day of employment with Seven, which Seven contended was 14 October 2011. Somewhat unusually, the post employment restraints that Seven relied on were not contained in Mr Warburton’s employment agreement, but in a separate Management Equity Participation Deed.

Mr Warburton’s primary argument was that the restraints that Seven sought to enforce were invalid. His alternate argument was that if the restraints were enforceable, any period of restraint should have commenced on 2 March 2011 (the day that Seven placed him on gardening leave) and not 14 October 2011.

Ultimately, the Court found that a restraint period of 10 months was appropriate. As with all decisions in this area of the law, the Court’s finding was based on what it believed, in the individual circumstances of the case, was reasonably required to protect Seven’s interests.

The Court formed the view that once Seven had finalised its plans for 2012, there was no real possibility Mr Warburton would be in a position to use any confidential information he had acquired whilst at Seven against Seven’s interests. As Seven would have finalised its 2012 plans by the end of 2011, the Court decided that Mr Warburton should be free to join Ten from 1 January 2012.

Warburton’s case serves as a reminder that the enforceability of post employment restraints is entirely dependent on the individual circumstances of each case. However, given that in general only the most senior members of an organisation’s management have access to commercial sensitive information, restraints targeted at employees outside of that group will not be enforceable.  All in all, the enforceability of a restraint comes down to what it is that the individual knows and whether there is a real possibility that that information could be used to harm the former employer.

Luke Mitchell