Employees ordered to pay $4 million

June 15th, 2012 at 3:00 pm by David Farrar

Both employers and employees breach employment contracts, but normally action is only taken against an employer. Let’s face it, if for example an employee resigns with only two week’s notice instead of the required four – it is not generally worth your time to spend money enforcing the contract.

But Andrew Scott-Howman blogs at Workforce on a recent NZ case where it was:

It’s one of the most difficult areas of : what to do where an employee has acted in breach of a restraint, or an obligation of confidentiality. But a recent decision of the Employment Court gives heart to employers – where you can establish breach, some serious consequences may follow for employees.

The case is Rooney Earthmoving v McTague, Whiting and Bartlett (unreported, Employment Court Christchurch, 23 April 2012).  It concerned three men, each of whom had been employed by the plaintiff before establishing a competing company (BMW Contracting).  A previous decision had established that the men had variously acted in breach of a number of contractual obligations owed to the former employer, including enticing away staff, securing customers and using the employer’s confidential information. …

First, the contractual measure of loss will often do just fine. In Plain English, these employees were liable to put the employer in the same position it would have been in if the various contractual breaches had not occurred. In this case, that meant a complicated assessment to work out exactly what business the employees had taken away from their old employer as a result of their breaches.

Secondly, some limitation had to be applied to the damages assessment (ie at some point, if the employees hadn’t acted in breach they would have become legitimate competitors). This involved the application of the doctrine of remoteness – an enormously complicated and contentious area of law in itself.

Finally, the quantum of loss assessed here was, on any view, massive : $4,290,000 – and, of course, because the debt is owed jointly and severally the employer can go after one, two, or all of the ex-employees for the whole amount.

As you can probably tell, this case is an important one for lawyers who may be called upon to advise in cases involving breaches of restraints and confidentiality.

But it is more than that. It is a decision that illustrates that the Court will not hold back in ordering massive damages – where a case justifies that.  And that sort of order will not be a “finger to the wind” type of award, but an astute objective assessment of actual contractual loss.

A $4 million award must be one of the largest in NZ – and especially for an award against employees, not an employer.

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12 Responses to “Employees ordered to pay $4 million”

  1. PaulL (5,965 comments) says:

    Wow. That’s a hell of an award for restraint of trade – although to be fair it sounds like their breaches were rather egregious.

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  2. Mark (1,479 comments) says:

    Seems reasonable to me.

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  3. Viking2 (11,412 comments) says:

    You are talking earth moving.

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  4. peterwn (3,243 comments) says:

    Several years ago there was a restraint of trade case involving an employee who ‘waka hopped’ from one coffee barrow to another. The coffee shop industry must have taken this very serious when advertised for a ‘barrister’.

    Courts will often not uphold excessively restraint of trade clauses for ordinary employees. For example if a hairdresser employee leaves a Wellington salon to work in a Waikanae salon then six months later works in another salon in Wellington, a court is enlikely to enforce restraint on her.

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  5. Simon Lyall (60 comments) says:

    While it is true that the clauses are useful they seem to be standard contract boilerplate at a lot of companies. For example I work in the Internet end of IT in a purely technical roll yet my employment contract when I worked at Telecom a few years ago said that for 3 months I couldn’t:

    ” Be [..] an employee in a business in the industries/fields where [Telecom] is operating or actively bidding or competing (including but not exclusively, business involved in telephony and/or Internet) expect with the prior written consent of [Telecom's] Chief Executive Officer. ”

    The same clause was/is probably in the contract of every person working for Telecom at the time since HR disliked changing contacts, especially for low-level employees. Pointless for 95% of them but in there all the same. Also due to the breadth of Telecom at the time just about any job I would have taken afterwards could have been seen as competing.

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  6. rolla_fxgt (311 comments) says:

    Ouch.

    Must be the largest ordered payout ever, fullstop. For both employers and employees.

    Will be interesting to see if this leads to a raising of the bar, for awards for employees too. One tends to follow the other.

    4 million is a US size award.

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  7. peterwn (3,243 comments) says:

    After having a glance at the judgments in question, I will carry on my hobby-horse that employees earning over $100k pa may be permitted to opt out of the Employment Relations Act and employers may seek a condition in negotiations that they do opt out. Employees earning over $100k should be able to look after themselves contracturally and if they are not confident with this, they need not seek >$100k jobs. One of the three concerned would have been in that category and it was ridiculous that the Employment Court had to handle the case instead of the High Court – with the potential of causing ‘Bleak House’ type situations as one of the judges pointed out.

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  8. KevinH (1,217 comments) says:

    Restraint of trade clauses in employment contracts should be tied to a compensation package for the duration of the stand down because to often than not these clauses are restrictive and non competitive.
    Employee’s can and do form relationships with customers that continue on after the employee has moved on, however a restraint of trade agreement can act as a barrier to that employee legitimately pursuing a business opportunity with that client that may be unconnected to the nature of their previous business relationship. For instance in this earthmoving case quoted an employee may be contracted by a former client to assist in restructuring their business utilising their industry skills.

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  9. GPT1 (2,116 comments) says:

    Mate of mine one of the counsel. Apparently it is the largest in NZ history.

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  10. happydaze (2 comments) says:

    To breach a contract I first thought you had to have one.

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  11. Nookin (3,281 comments) says:

    Why do you say that there was no contract?

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  12. happydaze (2 comments) says:

    one had no contract. simple no contract no breach

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