Poaching Employees and hidden legal restraint risks involved

In a NSW Supreme Court decision handed down by Chief Justice Bergin on 1 May 2013, the court took the unusual step of awarding costs against a non-party employer (Talent2) in a restraint case.

Talent2 funded a poached employee's defence to restraint of trade proceedings brought against him by his former employer (HRX). Talent2 was a direct competitor to HRX in the human resources market. HRX became aware of the former employee's new position and it sought to protect its legitimate business interests by seeking undertakings from both Talent2 and the employee. The undertakings required the executive to cease soliciting HRX's clients and to cease working for Talent2 pursuant to the employee's non-solicit and non-compete obligations in his contract of employment with HRX.

Talent2 funded the employee's defence, as it initially thought his case was strong and there was benefit for Talent2 in supporting him. However, once Talent2 realised during litigation that the quantum of evidence against the executive in relation to breaching his restraints was insurmountable it changed its mind.

Talent2 subsequently stopped funding the employee's case on 22 August 2013 and additionally advised him that if he did not resign, he would have to be terminated. The employee immediately resigned and wrote to HRX unconditionally submitting to the majority of the orders pressed by HRX in relation to the restraints.

HRX then sought costs from Talent2. HRX claimed 'Talent2 was the active party behind the defendant's unsuccessful defence of the proceedings.'

In determining the matter, Chief Justice Bergin held:

"It is incumbent upon employers who effectively poach their competitors' employees to ensure that those employees are not acting in breach of their obligations to their former employers, particularly where the consequence of such breach is a benefit to the new employer."

Practically speaking, this means that a new employer that is considering poaching an employee from a competitor should, at a minimum, carefully scrutinise the potential new employee's restraint of trade provisions in their current employment contract.

Funding a defendant in proceedings such as these can bear significant financial risk for the new employer, as Chief Justice Bergin stated:

"When a new employer 'stands up to' and funds litigation brought by the former employer against its new employee in circumstances where there are breaches of obligations owed to the former employer, the new employer may be at risk of an order being made against it under section 98 of the [Civil Procedure] Act. Of course it will depend on the circumstances of each case."

What is clear from this case is that non-parties to proceedings such as these can be liable for costs in circumstances where they elect to fund a defence of a poached employee that is in breach of the employee's contractual undertakings, even where they are not a party to the proceedings.

Should you have any questions or need any assistance in determining your obligations and exposure in recruiting employees of a competitor company, please contact National Workplace Lawyers on +61 2 9233 3989. 

National Workplace Lawyers

Note — this is for information purposes only and does not purport to be comprehensive or to render legal advice.