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Employment & Safety

1 November 2017

In this issue: we look at a restraint of trade clause in a business sale contract; a case that highlights the need for proportionality in a summary dismissal; the damages an employer can be ordered to pay when they repudiate an employment contract; the consequences of treating employees as independent contractors; and new guidance on the increased responsibility of franchisors under amended workplace laws.

Court enforces four-year restraint

In brief: A court has enforced a four-year restraint of trade clause in a business sale contract, preventing a part-time employee from taking up employment with a competitor after selling his stake in the business. Senior Associate John Naughton reports.

How does it affect you?

Restraint clauses in business sale contracts protect the goodwill in the business being sold.
Courts take a less restrictive view of restraints of trade in business sale contracts than those in employment contracts, in view of the consideration paid for the business.
In employment contract restraints of trade, ex-employees will ordinarily be prevented from being engaged in a business that is competitive with the employer's business at the time the employment ends.
Since restraints of trade in business sale contracts protect goodwill, the measure of whether a seller may take up employment with a competitor usually involves an assessment of the business's competitors at the date of the sale contract.

Background

On 28 June 2016, Christopher Palmer sold his 40 per cent shareholding in Southern Cross Computer Systems Pty Ltd (Southern Cross) for $3.5 million.

The business sale contract included terms that Mr Palmer would continue as an employee of Southern Cross, and that he would be subject to a restraint of trade clause preventing him from working for any competing business for a period of four years after the sale took place.

For some months after the sale, Mr Palmer engaged in employment one day per week with a direct competitor of Southern Cross. In response, Southern Cross sought an injunction seeking to restrain Mr Palmer from having any involvement with this competitor.

Decision

The decision turned on the restraint of trade clause in the business sale contract.

The clause provided for a maximum of a four-year Australia-wide restriction on Mr Palmer engaging or having involvement in any business in competition with the Southern Cross 'at the relevant time during the restraint period'.

Mr Palmer submitted that the 'relevant time' meant during the four-year restraint period, and that the restraint should not be enforced because the effect would be to widen the scope of the activities the restraint precluded him from undertaking (in effect, preventing him from competing in activities Southern Cross may not even have been undertaking at the date of the sale).

However, the Supreme Court of Victoria accepted that:

  • the objective intention of the restraint clause was to restrict competition with Southern Cross as its business activities stood the day the business sale agreement was signed (not after); and
  • the competing business was undertaking activities in competition with Southern Cross when the business sale contract was signed.

The court therefore decided that the restraint clause was enforceable, and the term and scope (ie. a four-year Australia-wide restraint from involvement in a competitive business and from soliciting employees of Southern Cross) was reasonable in view of Mr Palmer having received substantial consideration upon the sale of his shareholding.

Southern Cross was granted an injunction preventing Mr Palmer working for the competitor until 28 June 2020. The court also indicated that it was prepared to make an order restraining Mr Palmer from soliciting customers, subject to it receiving from Southern Cross a list of relevant customers.

Summary dismissal for theft found to be unfair

In brief: A recent decision of the Fair Work Commission has highlighted the importance of ensuring that the decision to summarily terminate an employee's employment is proportionate to their misconduct. Senior Associate Tarsha Gavin reports.

How does it affect you?

In determining whether to summarily dismiss an employee, employers should consider whether this outcome is proportionate to the employee's misconduct.
This includes considering any mitigating and aggravating circumstances or factors related to the employee's conduct.

Background

Mr Johnson was an employee of the Castlemaine IGA supermarket and was summarily dismissed for stealing three items of produce from the store. Mr Johnson contended that his supervisor allowed him to take the items as they were samples, and that there was a practice in the workplace of other employees also being authorised to take samples and excess items home.

Mr Johnson brought an unfair dismissal claim. This claim was initially rejected by the Fair Work Commission (FWC) on the basis that Mr Johnson had breached his employer's policy that expressly prohibited employees from removing sample items for the store. The FWC concluded that this constituted a valid reason for dismissal. Mr Johnson appealed the decision.

Decision

A full bench of the FWC ruled that this decision was in error. It decided that the Commissioner failed to consider the proportionality of the summary dismissal outcome to Mr Johnson's misconduct. This failure was considered by the full bench to be inconsistent with recent authorities that have emphasised the importance of considering proportionality. 

The full bench went on to reconsider Mr Johnson's dismissal. It decided that although there was a valid reason for the termination, there were a number of mitigating factors which meant that summary dismissal was not proportionate to his conduct. These factors included:

  • Mr Johnson's conduct had been authorised by his supervisor;
  • other employees engaged in the same practice;
  • Mr Johnson had a long history of service with the company; and
  • he was 63 years old and would be likely to have difficulties gaining new employment.

Accordingly, the full bench held Mr Johnson's dismissal to be harsh and ordered compensation, with the quantum of compensation still to be determined.

Damages for employer's repudiation of employment contract

In brief: The Victorian Supreme Court has awarded a former executive $423,445 in damages after the employer repudiated his employment contract. Associate Tegan Ayling and Lawyer Rhiannon Zanetic report.

How does it affect you?

Employers (or employees) repudiate employment contracts if they show an intention to no longer to be bound by the contract or to fulfil the contract substantially inconsistently with their obligations.
The damages awarded to the employee may not be limited to the period of notice the employee was otherwise entitled to under their employment contract.
The likely length of future employment will be relevant, which will be assessed in a hypothetical situation where the employer's repudiatory conduct did not occur.

Background

In a decision earlier this year, the Court of Appeal confirmed that Crowe Horwath Australia (CHA) repudiated its employment contract with Mr Loone, a Managing Principal with CHA. In that decision, the Court of Appeal did not enforce the post-employment restraints in that contract. See our article on this decision here.

The repudiatory conduct included CHA's failure to follow its own bonus assessment scheme. In particular, CHA told Mr Loone that it was going to alter the bonus scheme set out in his employment contract. It then failed to assess his bonus in accordance with the revised scheme.

Damages decision

In this case, the court was deciding on the damages to be awarded to Mr Loone.

Mr Loone argued that damages should be calculated on the basis that he would have remained at CHA for one more year if CHA had not repudiated the contract (ie he was entitled to damages of one year's pay, plus bonus). CHA disagreed and said that it was more likely that CHA would have terminated Mr Loone's employment after one month and paid him six months' pay in lieu of notice. CHA had the right to terminate Mr Loone's employment on six months' notice under his employment contract.

The court calculated Mr Loone's damages by determining how long he would have stayed employed if CHA had not repudiated his employment contract. This required a comparison between a hypothetical situation in which CHA's repudiatory conduct had not occurred and the situation that actually occurred. The court decided that, had CHA not engaged in the conduct, Mr Loone would have stayed employed for another year.

The court recognised that although an employer may have a right to terminate an employee's employment, this does not necessarily mean it would have exercised that right in a hypothetical scenario. In this case, CHA was unlikely to have terminated Mr Loone's employment in accordance with his employment contract.

The amount of damages included one year's salary and a bonus that would have been payable if the employment had continued.

'Bordering on impossible' that husband and wife duo were independent contractors

In brief: The Federal Court decided that a husband and wife who worked from home and sometimes outsourced their work were employees instead of independent contractors, making the employer guilty of sham contracting, underpayments and other breaches. Associate Tegan Ayling reports.

How does it affect you?

Employers should carefully consider whether to engage workers as independent contractors or employees.
Workers can be employees even if some characteristics of the relationship would indicate they are genuine independent contractors.
Incorrectly engaging an employee as an independent contractor may lead to multiple contraventions of legislation and the imposition of penalties.

Background

Royans Wagga Pty Ltd (Royans) is a truck repair business that also operates an accident reporting service as a way to reach more customers. Mr and Ms Putland each performed work similar to a call centre role in the accident reporting service. At various times during their engagements, Mr and Ms Putland worked from home and sometimes operated the service 24/7.

Royans always treated the Putlands as independent contractors, as did its Managing Director, Mr Andrews. However, after the accident reporting service was outsourced in May 2015, the Putlands claimed that they had been employees of Royans since September 2012. If the Putlands were right, they had been underpaid and not given payslips or notice of termination.

Decision

The court decided that the Putlands were employees of Royans. Although they had ABNs, issued tax invoices, worked from home often, did not wear uniforms and had on limited occasions paid others to do the work, these factors reflected the subjective intention of Royans to treat them as independent contractors and not the true nature of the relationship. In the court's opinion, most aspects of the arrangement pointed to the Putlands being employees.

The court considered the whole of the relationship between Royans and the Putlands, including the following factors in favour of an employment relationship:

  • the Putlands only performed work for Royans and had no true autonomy;
  • Royans paid for or supplied their equipment;
  • the Putlands did not advertise their own business;
  • goodwill from the work performed by the Putlands accrued to Royans; and
  • to the world at large, the accident reporting service was being provided by Royans.

However, the most important factor indicating an employment relationship was the authority to control that Royans had over the Putlands and their work. For example, after the Putlands had worked from home for a period of time, Mr Andrews told them they had to start working from the Royans office on weekdays. When Mr Putland did this, there was no significant difference between him and other workers who were being treated by Royans as employees. Even when the Putlands worked from home and had more flexibility, Royans still had the authority to control them in their work. The whole nature of the relationship demonstrated that the Putlands were not running their own business.

Royans had misrepresented that the Putlands were independent contractors, had underpaid them and had failed to provide them with payslips. Royans had also failed to give effective notice of termination to the Putlands, so they were entitled to a payment in lieu of notice.

Increased responsibility for franchisors under new laws

In brief: From 27 October 2017, franchisors may be liable if their franchisees contravene certain workplace laws. Senior Associate Chloe Wilton reports on practical steps that franchisors can take to reduce the risk of being held liable under these new laws.

How does it affect you?

Franchisors will contravene the Fair Work Act if a franchisee contravenes certain provisions of the Act relating to minimum terms and conditions of employment, payments, sham contracting and record keeping, and the franchisor:

exerts a significant degree of influence or control over the affairs of the franchisee. This is not limited to the franchisee's employment affairs;
knew or could reasonably be expected to have known that the relevant contravention or a contravention of the same or similar character was likely to occur; and
did not take reasonable steps to prevent a contravention of the same or similar character.

Practical steps to reduce the risk of liability

What constitutes 'reasonable steps' to prevent a contravention will depend on the franchisor's size, the sophistication of its franchisees and the types of people employed by the franchisees, including whether the employees are considered vulnerable, such as young people or migrant workers. At the recent National Franchise Convention, the Fair Work Ombudsman, Natalie James, confirmed that franchisors are expected to take at least the following steps.

Set clear expectations

Make it clear to franchisees that they are expected to comply with the requirements of the Fair Work Act. Best practice would be to include a requirement in the franchise agreement requiring compliance and stipulating the consequences for failure to comply.

Provide support to franchisees to comply with the Fair Work Act

At a minimum, franchisors should send franchisees a link to the Fair Work Ombudsman website and encourage them to sign up to 'My Account', which will help keep them up-to-date about changes to workplace laws, including wage rates in their industry. Other types of support could include centralised payroll, HR support and encouraging franchises to join an industry association such as the Franchising Council of Australia. Less sophisticated franchisees employing vulnerable workers will require a greater level of support.

Monitor compliance

There are various ways franchisors can monitor their franchisees' compliance, including:

  • setting up employee hotlines or an email address that franchisees' employees can use to contact the franchisor about any employment issues;
  • auditing franchisees' employee records; and
  • encouraging franchisees' employees to use the Fair Work 'Record My Hours' app to record their hours of work and help them check their payslips.

For further information, please contact:

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