Can a contract prevent your customers from poaching your employees?

It is common for employment contracts to contain post-employment restraints, but it is less common to see clauses in agreements with customers (for example, in services agreements) which prevent the customers of a business from “poaching” the employees of the business. There are good reasons for this – when post-employment restraints are dealt with in employment contracts, they can be fashioned to fit the employer’s interests in relation to the services of the particular employee; in a customer agreement, a clause will have to anticipate the interests in relation to the workforce as a whole.

However, an “anti-poaching” provision in a services agreement can be enforceable, as the New South Wales Supreme Court has recently demonstrated.  In this case, the Court granted an interlocutory injunction to prevent a company from employing a manager who was formerly employed by a service provider to the first company (that is, the new employer was effectively the old employer’s customer).

The facts

A manager who was formerly employed by a company called Quantum Service and Logistics Pty Limited (Quantum) resigned from his employment to take up employment with a company called Schenker Australia Pty Ltd (Schenker).  Part of Quantum’s work (and the work in which the manager was engaged) was the provision of services to Schenker, which enabled Schenker to provide services to Fuji Xerox (in effect, Schenker had subcontracted out part of Schenker’s Fuji Xerox work to Quantum).

The Services Agreement which governed the subcontract work did not oblige Schenker to act in the best interests of Quantum, did not oblige Schenker to acquire services exclusively from Quantum, and did not create a joint venture or any other fiduciary relationship between Schenker and Quantum. However,  the Services Agreement did contain the following clause:

13.13. Solicitation for Employment. The parties agree that neither party and their associated entities, sub-contractors or their employees will employ or approach for employment, the employees or ex-employees of the other party, during the term and until a minimum period of six (6) months following the termination of this agreement.

Although there were provisions in the manager’s contract of employment with Quantum dealing with the protection of confidential information, there was no provision which would have prevented him from taking up the employment with Schenker. Accordingly, Quantum commenced proceedings against Schenker seeking to enforce clause 13.13 of the Services Agreement. On an urgent basis, Quantum sought an interlocutory injunction restraining Schenker from employing the manager until final hearing.

The decision

Because the matter was considered at the level of an interlocutory injunction, the Court did not make a final ruling as to the enforceability of clause 13.13. However, the following important points were made by the Court in granting the interlocutory injunction:

  • The Court accepted that Quantum had an interest in protecting its confidential information, and maintaining the stability of its workforce, which might support a clause in terms of clause 13.13;
  • Clause 13.13 was probably invalid at common law, because it would apply to employees who had no access to Quantum’s confidential information as well as to those (such as the manager) who did have access to confidential information. However, this invalidity could probably be saved by the application of the Restraints of Trade Act 1976 (NSW);
  • Because of the subcontract arrangement, Quantum was “exceptionally” and “particularly” vulnerable to Schenker acquiring the goodwill of Quantum under the Services Agreement by employing Quantum’s employees (so that Schenker could perform the work which Quantum had previously provided under the Services Agreement itself); and
  • Finally, it was relevant that clause 13.13 had been specifically inserted into the contract at Quantum’s request rather than being “boilerplate” in circumstances where Quantum had no other contractual protection against a decision by Schenker to bring the sub-contracted work back in-house.

In weighing up the balance of convenience, the Court considered that if the manager was permitted to commence employer with Schenker, it would be very difficult for Quantum to show that the manager had misused any confidential information of Quantum. The risk of misuse was not merely theoretical, because there was at least a risk that confidential information might be used to enable Schenker to provide, directly to Fuji Xerox, the services which Schenker would otherwise obtain from Quantum.

Where did this leave the manager?  The Court noted that an open offer had been made by Quantum to re-employ the manager on the same terms which had previously applied to him (which included remuneration of about $22,000 less than the manager would have received had he commenced employment with Schenker). The Court made the injunction conditional upon Quantum implementing this offer in a bona fide way.  That conclusion may seem harsh as far as the employee was concerned (especially as Quantum had not taken any post-employment restraint from the employee directly) but ultimately it flowed from the commercial decisions made by Quantum and Schenker in making the Services Agreement.

The lessons from the case

Although the case confirmed that it is possible to include “anti-poaching” provisions in contracts with customers, the decision also demonstrates that dealing with these issues in the employment contracts of your employees is a much better way of dealing with the issue.  The fact that clause 13.13 applied to all employees made it invalid at common law, and if the Services Agreement had been governed by, for example, Victorian law, the Restraints of Trade Act 1976 (NSW) would not have been available to (at least arguably) validate clause 13.13 in relation to senior employees.

The significance given to the fact that clause 13.13 was specifically negotiated also demonstrates that post-employment restraints should not be treated as “boilerplate”.  The more attention is given to the specific circumstances of the post-employment restraint, the more likely it is that the restraint will respond to the specific circumstances of the contract (for example, Quantum’s specific vulnerability to the subcontract being brought in-house).  A more specific clause is likely to provide better protection against commercial harm, and is also more likely to be enforced, because it will be easier to establish that a specific clause is no wider than is needed to protect the employer’s legitimate interests.

For more on our employment law capabilities, contact Leonard Lozina or Angus Macinnis

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February 5
Employment Law Litigation and dispute resolution