Court decision shows how employers can prevent ex-staff taking clients

Employers looking to stop former staff from poaching clients have been given a new legal strategy after the New South Wales Court of Appeal back an insurance company that used a “cascading” restraining deed in its employment contract, with nine separate clauses the employee couldn’t breach.

Insurance broker OAMPS took former employee Peter Hanna to the NSW Supreme Court after discovering Hanna, who left OAMPS for rival Strathearn Insurance Brokers In June, had broken his restraining deed by approaching clients he dealt with while at OAMPS.

OAMPS used a complex restraining deed known as with a “cascading” or stepped approach, whereby Hanna could not entice and solicit his OAMPS clients for periods of 15, 13 and 12 months and across areas the areas of Australia, New South Wales and Sydney.

The restraint deed was designed to have a cumulative effect, with each of the restraint areas and time periods working together – that meant the widest intended restraint was Australia-wide for 15 months, and the narrowest restraint was in Sydney for 12 months. In total, there were nine combinations of restraint areas and time periods.

However, OAMPS alleged that not long after leaving the company had contact with a number of clients he had while at OAMPS.

While Hanna attempted to challenge the restraint clause as being unreasonably broad, NSW Supreme Court judge Justice David Hammerschlag disagreed.

He found that the way the deed restrained Hanna from having major dealings with customers was reasonable because Hanna was the “human face” of the OAMPS business.

He also found the deed was reasonable in the way it restrained Hanna from working across Australia, as restraint clauses generally do not have area-style limitations.

The judge found a restraining order of 12 months was reasonable, specifically because the insurance business works on a 12-month sale cycle, and Hanna’s “connection” with his OAMPS clients would only be “severed” after that period.

“At a minimum therefore, protection for 12 months is reasonable. This is the minimum necessary to give OAMPS one opportunity to cement its connection or for the defendant’s connection to be severed across the portfolio.”

Hanna appealed the decision, but the appeal was dismissed earlier this week.

IR lawyer Peter Vitale says the OAMPS restraining deed is an example or a simple, straightforward deed that has been drafted with the specific sales cycle of the insurance industry in place.

“In the end, what this shows is that with careful drafting it is quite possible and legitimate to require someone to observe those cascading clauses,” Vitale says.

“It’s not just the circumstances of the employee that matter, it’s important to carefully consider the nature of the former employers business.”

Vitale says that importantly, OAMPS did not try to restrain Hanna from carrying out his profession, but rather acted to safeguard its specific clients.

“The idea is to be specific. Don’t try and rely on an all-encompassing deferral to the court to figure out what the clauses of the restraint are, because they won’t do it.”