By Laura Sowden, Partner and Theresa Au, Law Graduate

What about if the employer repudiates the contract?

Repudiation   

Repudiation refers to the conduct of a party which displays an intention no longer to be bound by the contract or to fulfil it only in a manner substantially inconsistent with the party’s obligations.[1]

Examples of conduct that may constitute repudiation include:

Employer

• Failing to pay the employee the agreed remuneration
• Reducing an employee’s remuneration or withdrawing a contractual benefit without consent
• Unilateral changes to an employee’s role which result in a significant reduction in status and/or responsibilities

Employee

• Not turning up for work
• Resigning part way through a fixed term contract
• Refusing to perform a key part of their role
• Engaging in serious and wilful misconduct

When the employer repudiates

In Crowe Horwath v Loone,[2] the Court established that termination of employment by the employer’s repudiatory conduct will render all post-employment restraints unenforceable

In this matter the employee, Mr Loone was a Managing Principal and played a significant role in the company’s acquisition of another firm.

A dispute arose after the Employer indicated that it did not intend to take this factor into account when assessing the ‘bonus pool’ upon which it would calculate Mr Loone’s discretionary bonus, and that it intended to modify its incentive scheme and Mr Loone’s role. In response, Mr Loone resigned and refused to work out any notice period on the basis that the Employer had repudiated the employment contract. He subsequently started his own firm 5kms away.

At trial, it was found that the Employer had repudiated Mr Loone’s employment contract by:

• Breaching his employment contract by excluding the acquisition from the bonus pool
• Breaching his employment contract by proposing to introduce a new incentive model under which payment of 20% of Mr Loone’s annual bonus would be deferred for 3 years.
• Proposing changes which would involve a significant reduction of Mr Loone’s staff management responsibilities and profit and loss responsibilities.

The Court found that Mr Loone was entitled to accept the Employer’s repudiatory conduct and that the (otherwise enforceable) post-employment restraints did not survive termination of the contract brought about by that acceptance.

On appeal, the initial decision was upheld, and it was noted that there is no Australian authority in which a court has enforced a restraint of trade provision where an employee ended the contract after an employer’s repudiation. This being the general proposition.

Mr Loone was awarded significant damages comprising of 12 months remuneration and his bonus entitlement.

When Employer Conduct does not amount to repudiation

In Liberty Financial & Jugovic,[3] a long-standing executive employee resigned to work in a competitor’s start-up business in an almost identical role.

His employer sought to enforce the post-employment restraint contained in his employment contract to protect its confidential information, that is, the insider knowledge that the employee acquired during his employment including detailed knowledge of the employer’s clients. The Court confirmed this was a legitimate interest to protect.

The Court also agreed the restraint did no more than reasonably necessary to protect this interest, as it only prohibited the employee from providing ‘services which are the same or similar to those’ he provided his employer in the last 12 months of his employment.

The employee argued that the employer repudiated the employment contract after having failed to make payments on termination and that accordingly, the restraint was unenforceable.

The Court rejected this argument given its timing (during the proceeding) appeared ingenuine and contrived to avoid compliance with the restraint. The Court confirmed the employment agreement came to an end upon resignation, that relevant entitlements only accrue on termination and any delay in payment is unlikely to amount to an act of repudiation.

Key takeaways

If (1) an employer repudiates a contract of employment and (2) the employee accepts that repudiatory conduct, then the employer is likely prevented from relying on post-employment restraint clauses against the employee in the event of termination.

The effect of this it that the exiting employee may not be restrained from working with a competitor, despite the written terms of a restraint of trade in their contract of employment. In this labour market employers more than ever need to be mindful of their conduct towards employees if they wish to seek to enforce or otherwise rely on a restraint of trade.

[1] Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd [2007] HCA 61.

[2] [2017] VSC 163.

[3] [2021] FCA 607.