A court has stopped a senior manager from taking up a role with a competitor until after the expiration of paid “gardening leave” plus a 6 month post-termination non-compete restraint due to the risk of escape of confidential information.
David McMurchy was the top man for Employsure’s small business personnel management product, BrightHR.
His June 2019 contract required the giving of three months’ notice of termination and included a post-employment restraint preventing him taking up a role with a competitor. It specified cascading durations from which the most appropriate period could be chosen namely 12, 9, 6 or 3 months.
It also required that he not be engaged – while performing his role – in any outside employment that might hinder or otherwise interfere with the performance of his duties.
In December 2020 McMurchy accepted a role with Elmo – an Employsure competitor – to manage the roll out of that company’s brand new Breathe HR product.
He purported to give four weeks’ notice of termination of employment.
He also passed over contact details for Arumugam Kumaran – a senior inbound sales consultant at Employsure – who signed up with Elmo in January 2021 and offered to supply other names to assist the company’s recruitment drive.
Recognising that the employer-employee bond was irretrievably broken, Employsure gave McMurchy three months’ notice of termination in January 2021 and directed he stay offsite but be available to respond to queries and perform duties as requested under the “gardening leave” provisions of his contract.
It then commenced proceedings in the NSW Supreme Court to enforce the confidentiality obligations and non-compete restraints in his employment contract and that of Kumaran.
Justice John Sackar was asked to rule the three-month notice period in McMurchy’s contract and the post-termination restraint that applied to both were reasonable and enforceable.
He concluded that a restraint of 9 months was reasonable but in McMurchy’s case the mandatory three month notice period should be accounted for as part of the total duration.
He also ruled that McMurchy had breached his employment terms by inducing his co-worker to end his work with Employsure and providing confidential employee contact details to his new boss.
Both employees appealed the validity of the non-compete restraints and the reasonableness of their duration.
Justice Fabian Gleeson – in delivering the lead judgment of the court – noted that Employsure had a legitimate interest in protecting confidential information that could come into a competitor’s hands to its detriment.
To that end, an employee non-compete restraint that operated after an employee’s departure was enforceable.
He also agreed with the primary judge that a 9 month period – i.e. six months from the end of the notice period – was appropriate in McMurchy’s case given his managerial status and detailed knowledge of the product against which he intended to compete.
Although the reasonableness should be considered prospectively at the time the restraint is entered into, it was not to be interpreted having regard only to competitors that existed at the date of entry into of the employment contract.
Rather, the parties’ agreement that the restraint would be triggered only if there was competitor at the date of termination recognised the possibility that a rival might come into existence at a later time.
A restraint to protect against misuse of confidential information was also reasonable in Mr Kumaran’s case but because his client facing role did not expose him to the same level of confidential information, 9 months was unreasonable.
“The finding was irreconcilable with the related finding that much of the information to which Mr Kumaran was exposed would no longer be in his memory”.
“Given the nature of his low-level position and duties, the currency of any confidential information obtained by Mr Kumaran would be short-lived,” Justice Gleeson observed. The validity of a shorter term provided for in the cascading restraint – ie 3 months or 6 months – was not considered because Employsure did not mount any alternative argument to that effect.
The court also found that the restraint of trade provisions that applied during the their employment with Employsure, were also valid.
McMurchy v Employsure Pty Ltd; Kumaran v Employsure Pty Ltd [2022] NSWCA 201 Gleeson JA Leeming JA Kirk JA, 11 October 2022 Read case
