Australia: Recent Australian Superior Court Decisions: 6 Month Restraint of Trade Upheld, College Lecturer Denied Superannuation

Key Facts

Authors: Greg Robertson, Mariam Chalak & James El-Jalkh

Two significant decisions have come out of the superior courts of Australia in the month of May. These decisions have important implications for employers and their rights and obligations in relation to two important issues:

1. the enforcement of restraint of trade obligations in a written contract of employment, explored in Janala Pty Limited v Hardaker (No 3) [2023] NSWSC 446; and
2. the distinction between an employee and independent contractor, explored in JMC Pty Ltd v Commissioner of Taxation [2023] FCAFC 76.

This article provides a summary of the two decisions above and key takeaways for employers.

1 The enforceability of restraint of trade clauses

The Supreme Court of New South Wales has held that a 6 month restraint on a former project manager (Mr Hardaker) for a sensitive freight services company (COPE) from being employed by a competitor or soliciting clients was enforceable.

In his decision of 2 May 2023 in Janala Pty Limited v Hardaker (No 3) [2023] NSWSC 446, his Honour Justice Mark Richmond held that COPE had legitimate interests in protecting its confidential information and goodwill. The latter concerns personal relationships an employee builds with their employer’s clients.

His Honour held that the 6 month restraint provided a balance between the reasonable protection to which COPE was entitled and the project manager’s right to practise a trade or profession. His Honour reached that decision taking into account the fact that:

1. Mr Hardaker had a client facing role and was in contact with key employees of COPE customers, with knowledge of confidential information such as pricing;
2. Mr Hardaker had an important role in dealing with the healthcare sector, which was of strategic importance to COPE;
3. restraining Mr Hardaker for working for a competitor for 6 months would allow COPE to find another employee to fill his former role and build similar relationships; and
4. the fact that the parties had agreed, in the employment contract, to a 6 month restraint.

His Honour also noted the fact that Mr Hardaker was not prevented from working entirely – he could work in the freight industry without necessarily working for a direct competitor.

The dispute arose because Mr Hardaker had, prior to the termination of his employment, diverted work from COPE to a partnership and company he had registered with another COPE employee. After learning of that fact, COPE asked Mr Hardaker to sign a written undertaking to the effect that he would stop diverting work. The undertaking also sought to extend the restraints in his contracts from 6 to 12 months. His Honour considered whether that undertaking constituted a legally binding contract and, whilst he found that it did, his Honour simultaneously held that the extension in length of the restraints was not reasonable, meaning the restraints were only enforceable for 6 months.

2 The distinction between an independent contractor and employee

The Full Court of the Federal Court of Australia in JMC Pty Ltd v Commissioner of Taxation [2023] FCAFC 76 was recently required to consider the distinction between an independent contractor and employee for the purposes of determining whether a worker was entitled to superannuation under taxation legislation.

The facts

Ultimately, the Full Court determined that the worker was an independent contractor and not entitled to superannuation. The Full Court considered the following facts in its decision:

5. the Applicant was JMC Pty Ltd (JMC) (the taxpayer and a higher education institution) and the Respondent was the Commissioner of Taxation;
6. the worker was a lecturer (Mr Harrison). Mr Harrison was a sound engineer and provided teaching services to JMC;
7. JMC and Mr Harrison entered into a series of short term written contracts. The contracts provided that Mr Harrison was engaged as an independent contractor. Under the contracts, Mr Harrison had a right to subcontract (with the written consent of JMC);
8. Mr Harrison also provided JMC with invoices, maintained an Australian Business Number (a unique identifying number used by businesses) and was paid in accordance with the invoices. As a result of this understanding, JMC did not consider that Mr Harrison was entitled to superannuation; and
9. the Commissioner of Taxation issued JMC with a notice of assessment that the superannuation guarantee charge was payable on the basis that Mr Harrison was actually an employee, not an independent contractor.

The relevant framework

The Full Court applied the decisions of the High Court of Australia in ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2 and Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd [2022] HCA 1 to determine whether the worker was an employee or independent contractor. Accordingly, the Full Court applied the following framework (as established by the High Court of Australia):

1. where the rights and duties of the parties are contained in a written contract, then the legal rights and obligations established by the contract are decisive of the character of the relationship (assuming that there is no sham);
2. the standard principles of contractual interpretation are applied to interpret the written contract;
3. the characterisation of the relationship is not affected by circumstances, facts or occurrences between the parties that have no bearing on their legal rights;
4. relevant contractual provisions that the court will consider include the mode of remuneration, provision and maintenance of equipment, hours of work, provision for holidays, deduction of income tax, delegation of work and the right to exercise discretion and control;
5. the ability of the worker to control their mode and method of work is important; and
6. a label is not determinative of the nature of the relationship and will rarely assist the court.

The Full Court’s decision

The Full Court ultimately found that the contract provided that Mr Harrison had a right to subcontract. The Commissioner of Taxation raised the point that this right was fettered and because Mr Harrison was required to seek the consent of JMC, then the right to subcontract did not actually exist. Whilst the trial judge agreed with the Commissioner of Taxation’s submission, the Full Court did not. The contract was clear, and the right to subcontract was capable of being exercised (and indeed Mr Harrison subcontracted his services a few times). The Full Court provided that the right to subcontract is inconsistent with an employment relationship, and it will only be discounted if the contractual right is a ‘sham’ or not capable of being exercised. The Full Court also found that requiring written consent of a principal to subcontract is not unusual and is in fact necessary to ensure quality control.

Key Action Points for Human Resources and In-house Counsel

• The law concerning restraints of trade in Australia is difficult and often unpredictable. It is important to maintain well-drafted contracts and to seek legal advice on the enforceability of restraint clauses.
• Draft ‘cascading’ restraints to maximise protection for businesses and improve the likelihood of enforceability of the restraints.
• It is essential that the distinction between an employee and independent contractor is understood and correctly applied. If the definition is misapplied, this can give rise to breaches of the Fair Work Act 2009 (Cth) or breaches of taxation or other employment-related legislation. Breaches of those statutes can attract significant penalties.
• More decisions are coming out of superior courts that emphasise the importance of the written contract. It is essential that if a business engages an independent contractor, that a comprehensive independent contractor agreement is prepared setting out the rights and obligations of all parties.