Employsure Pty Ltd v McMurchy

Supreme Court of NSW|2021-02-08|Before: Parker J, Austin J

Judgment

In this judgment I set out my reasons for interlocutory orders I made on Monday 8 February. The orders were made on the application of a former employer who is seeking to prevent its former employee from working for his new employer, or limiting the work he can perform in his new employment.
Employsure Pty Limited ("Employsure"), the plaintiff, carries on business as a provider of human resources and workplace health and safety services to employers. It operates throughout Australia and New Zealand and focuses on the small and medium enterprise ("SME") market. Employsure conducts a subscription business. Its customers subscribe for its basic services and may also purchase additional products and services which complement those basic services.
David McMurchy, the first defendant, worked for Employsure from May 2015 until January this year. At the time the dispute arose he was the manager responsible for the sale and support of human resources ("HR") software known as "Bright". This software is one of the additional products which Employsure markets to its customers. Mr McMurchy's title was "Manager, Bright".
In December last year, Mr McMurchy agreed to leave Employsure and work for ELMO Software Limited ("ELMO"), the second defendant. His employment by ELMO was to begin in January. ELMO agreed to employ Mr McMurchy as the sales manager for a software platform called "Breathe". Breathe was developed in the United Kingdom. It provides what is described as a "self service HR platform" which is particularly suitable for the small business market, consisting of organisations with fewer than fifty employees. ELMO has acquired the Australian and New Zealand rights to the product and plans to launch it here later in the month.

Employment restraint

Clause 5 of the 2018 employment contract dealt generally with Mr McMurchy's duties. It provided: 5. PRINCIPAL DUTIES 5.1 The Employee must (a) devote the whole of their time, attention and skill during normal business hours, and at other times as reasonably necessary, to their duties for the Company (b) faithfully and diligently perform the duties and exercise the powers entrusted to them from time to time (c) promote the interests and prosperity and enhance the reputation of the Company (d) comply with all reasonable and lawful orders and directions given to them by the Company (e) comply with the Company's policies and procedures, as amended from time to time 5.2 The Employee's general duties are set out in their job description which may be updated and amended from time to time.
Clause 18 dealt with "outside employment". It relevantly provided: 18. OUTSIDE EMPLOYMENT 18.1 Except as provided in this Agreement, the Employee must not solicit or accept any payment or other benefit as an inducement or reward for any act in connection with the business of the Company. 18.2 Without the prior written consent of the Company, the Employee must not, while employed by the Company, be engaged or interested in any other business or occupation (whether paid or unpaid) (Additional Business) that, in the reasonable opinion of the Company, may hinder or otherwise interfere with the performance of the Employee's duties.
Clause 19 dealt with termination. It provided for termination on notice, summary termination for cause, and immediate termination with payment in lieu of notice. The provisions relevant for present purposes were: 19. TERMINATION OF EMPLOYMENT 19.1 Despite any other provision of this Agreement, this Agreement may be terminated in writing, at any time by either party, and with the period of notice set out in Item 9 of the Schedule [which specified three months] (or such shorter period as may be agreed). … 19.3 The Company may require that the Employee: (a) not attend the office (b) not undertake any work (c) undertake only limited work during part or of the notice period referred to in this clause. 19.4 [Immediate termination for cause] 19.5 If this Agreement is terminated by way of "immediate termination" under this clause then the Company is not required to provide the Employee with a period of notice (or payment in lieu of notice), including the period of notice set out in Item 9 of the Schedule, and the agreement will come to an end on the date written notice of termination is provided or the date specified in the written notice. 19.6 [Payment in lieu of notice] 19.7 The Company may suspend the Employee on full pay for any period if the Company considers it in the best interests of the Company to do so. 19.8 On termination of this Agreement, the Employee must return to the Company all tangible property of the Company including all Confidential Information, books, documents, papers, Materials, credit cards, cars and keys held by or under the control of the Employee.
In its application, Employsure seeks an order restraining Mr McMurchy until 9 January next year from being engaged or interested in any business of selling or supporting HR software operated by ELMO (or its subsidiary, Breathe Software Pty Limited). For the period up to 11 April this year, Employsure relies on the employment restraint in clause 18.2. Unlike the restraint covering the post-employment period, that restraint does not depend upon ELMO's business competing with Employsure's. All that is required is for Employsure to form the opinion, reasonably, that Mr McMurchy's employment with ELMO might hinder, or otherwise interfere with, the performance of his duties for Employsure.
Counsel for the defendants contends that Mr McMurchy's employment with Employsure has ceased and Employsure had no power to put him on gardening leave. But if this contention fails, I did not understand counsel to dispute that the restraint applies.
Counsel raised five points by way of defence to Employsure's claim under clause 18.2. I will deal with them in turn.
The first point was a procedural one. Counsel argued that the Court could not grant an injunction which proceeded on the basis that Mr McMurchy was still employed, without determining that he actually was still so employed. Counsel observed that no such declaration had been sought by way of interim relief in the notice of motion. Counsel also stated that she did not appreciate that any such interim determination would be sought on the application.
I thought the premise of this argument was unsound. A declaratory order is final in nature: see Warramunda Village Inc v Pryde (2001) 105 FCR 437 at 440. As with any other final order, the Court may make a declaration at any stage of the proceedings should the circumstances make it desirable to do so: see Uniform Civil Procedure Rules 2005 (NSW), r 36.1. But if the Court makes such an order, the order can only be a final one. An "interlocutory declaration" (meaning a declaration operating for the duration of the proceedings) is not known to the law: Graham Barclay Oysters Pty Ltd v Ryan (2002) 211 CLR 540 at 590-591.
When the present application came before the Court, there was little, if any, prospect of successfully challenging any injunction which might be granted before the period of time covered by the restraint would run out. The grant of an injunction would thus be virtually final in effect. In such a case, the court may be less inclined to grant an injunction merely because the plaintiff has demonstrated a reasonably arguable case: see Kolback Securities Ltd v Epoch Mining NL (1987) 8 NSWLR 533 at 536. But the test remains whether the plaintiff's case is of sufficient strength to justify the relief which is sought. The injunction remains, both as a matter of form and of substance, interlocutory.
Nor did I accept that there was any relevant prejudice to the defendants. The application for interlocutory relief clearly specified that a restraint was being sought which covered the period up to 11 April. It was clear from the material in support of the application, and from counsel's submissions, that Employsure was relying on clause 18.2.
Counsel's second and third points attacked the merits of Employsure's clause 18.2 claim. Counsel submitted that the claim did not give rise even to an arguable case. Alternatively, the claim was so weak that it did not justify the grant of interlocutory relief.
The second point focused on the signed variation documents which I have already mentioned, and which the defendants contend had the effect of reinstating the terms of the 2015 contract. The variations were in common form which is exemplified by the one which altered Mr McMurchy's position to "Manager, Bright". The document relevantly provided: Amendment to terms and conditions of employment Your contract of employment dated 23 January 2015 (Employment Agreement) is being amended as follows: Job Title Your job title will be Manager, Bright You will report to the Manager, Workplace Relations in this role, unless notified otherwise. This amendment will take effect from 20 April 2020. All other terms and conditions of your employment remain unaltered and your Employment Agreement otherwise continues to apply, however, for the avoidance of doubt, in the event of any inconsistency between the terms stated above and your existing Employment Agreement, these terms will prevail.
As already noted, the first response from Employsure was to rely on the principle of contractual construction that the court can ignore or correct contractual language which is obviously absurd or inconsistent: Fitzgerald v Masters (1956) 95 CLR 420 at 426-427; see also Pittmore Pty Ltd v Chan [2020] NSWCA 344 at [102].
The difficulty with reading the defined term "Employment Agreement" as a reference to the employment agreement signed by Mr McMurchy in 2015 is that the variation document used the language of amendment, not revival as the defendants' contention requires. The "Employment Agreement" was expressly described as "existing". At the time of the variation, the 2015 agreement had been discharged and replaced by the 2018 agreement (the 2018 agreement contained an express provision to this effect). It was not in force and could not "remain unaltered" or "[continue] to apply".
For these reasons, there is a strong case for the application of the principle in Fitzgerald v Masters. That principle would allow the Court to read the 2015 date as an erroneous reference to the 2018 contract. Even more readily, the reference to the 2015 date could simply be omitted entirely (that is an approach sanctioned by Fitzgerald v Masters and was applied, for example, in Pittmore).
For these reasons, I consider that Employsure has an arguable case that the termination provisions of the 2018 employment agreement continue to apply. Indeed I think Employsure's case is more than just arguable; it is strong. I therefore do not need to address Employsure's alternative claim of rectification.
The third defence point concerned the construction of clause 18.2. Counsel submitted that the clause applied only to "secondary employment", meaning employment alongside Mr McMurchy's work for Employsure.
Counsel submitted that in clause 18.2 the phrase "while employed by the company" referred to the period of time during which Mr McMurchy was actually working for Employsure. It did not apply in the present circumstances where Mr McMurchy refuses to acknowledge any employment relationship and is not actually performing any work for Employsure.
The alternative construction is that the phrase refers to the period of time during which the employment contract continues to subsist. The parties agree that an employee's repudiation terminates the employment relationship but does not terminate the employment contract unless it is accepted by the employer: Purcell v Tullett Prebon (Aust) Pty Ltd [2010] NSWCA 150 at [17]-[19]. Thus if the notice period under Mr McMurchy's employment contract is three months, that contract remains on foot.
The question of construction posed by the competing arguments must of course be determined by reference to the terms of the contract as a whole. These include the termination provisions in clause 19 which I have set out above. Those provisions clearly contemplate that Employsure may take the approach it has purported to take in this case, namely putting Mr McMurchy on "gardening leave" until the end of his notice period. Clause 19.2 expressly provides that Employsure may direct Mr McMurchy to do nothing. There is also an express provision in clause 19.7 for suspension which would operate in a similar way without any question of termination of the contract arising.
It is plainly arguable that in this context the reference to the period of Mr McMurchy's "employment" in clause 18.2 means the period during which his employment relationship subsists, whether or not he is actually performing work for Employsure. The defendants' alternative reading would deprive the "gardening leave" (and suspension) provisions in clause 19 of most, if not all, of their practical value.
Again I do not consider that the point raised by the defence deprives Employsure of an arguable case. In fact I think that again, Employsure's case is more than arguable.
Counsel's fourth contention was that, even if Mr McMurchy was in breach of his contract by repudiating his obligations to Employsure, injunctive relief is not available. Counsel submitted that the Court should not grant what was effectively specific performance of Mr McMurchy's employment contract.
The same argument was raised before Brereton J in Tullett Prebon (Australia) Pty Ltd v Purcell [2008] NSWSC 852; 175 IR 414. His Honour analysed the authorities at [72]-[87]; 435-439. The court will not grant specific performance of a contract which would require it to supervise the provision of personal services by the employee. The court can enforce, by prohibitory injunction, a negative stipulation preventing the employee from working for someone else. But it will not do so if that would in effect force the employee to work for the employer. Leaving the employee with the choice of working for the employer or remaining idle is not acceptable (even if the employer pays the employee's salary). But an injunction can be granted if it leaves the employee free to work in a different field, albeit a less remunerative one.
Applying these principles to the present case, I reject counsel's submission. The injunction sought by Employsure would only prevent Mr McMurchy from working for ELMO. He is not required to choose between returning to work for Employsure and remaining idle.
The fifth point was of more substance. It concerned the duration of the notice period.
Employsure's case is that Mr McMurchy's letter of 14 December was wholly ineffective to terminate the employment contract. Thus, Employsure contends it was able on 12 January to give its own notice terminating the contract with effect from three months after that date.
Counsel for the defendants argued that Mr McMurchy's letter of 14 December was effective to give notice of termination even if the reference to a four week notice period was incorrect. If the proper notice period was three months, the termination took effect on that date. On this view, the clause 18.2 restraint could not extend beyond 14 March.
This argument raises the legal effect of Mr McMurchy's letter of 14 December purporting to terminate his employment. The critical part of the letter stated: Please accept this letter as formal notice of my resignation from my position as Manager, Bright at Employsure Pty Ltd. My last day of employment will be Monday, January 11th, 2021.
The proposition for which counsel for Employsure contended was that an employer entitled to three months' notice who was only provided with one month's notice remains entitled to a full three months' notice from the date when the purported notice expires. In support of that proposition, counsel cited Gunton v Richmond-upon-Thames London Borough Council [1981] Ch 448 at 469 and Mark Irving, The Contract of Employment (LexisNexis Butterworths Australia, 2012) at [11.65]. Mr Irving's work refers in addition to the judgment of the High Court in Automatic Fire Sprinklers v Watson (1946) 72 CLR 435.
Neither Watson nor Gunton supports the exact terms of counsel's proposition. In both cases, an employee was given an invalid notice of termination by his employer. The employee contested the validity of the notice and continued to work for the employer. In each case, it was held that the employee's claim for wrongful termination only began when he was actually excluded by the employer from working at the end of the purported notice period.
In neither of these cases was the invalidity of the purported termination in issue. Counsel for Employsure submitted that in order to be valid, a notice of termination must specify, or make it possible to ascertain, the time when the termination will take effect. In support of this proposition, counsel cited the decision of White J (as his Honour then was) in Fardell v Coates Hire Operations Pty Ltd [2010] NSWSC 346 at [82]. Counsel argued that an erroneous specification of the termination date made the notice invalid.
The terms of counsel's proposition reflect what White J said in Fardell. His Honour appears to have derived the proposition from an article in the Australian Law Journal (GJ McCarry, "Termination of Employment Contracts by Notice" (1986) 60 Australian Law Journal 78 at 79). That author, in turn, relied on two English decisions, Morton Suntour Fabrics v Shaw (1967) 2 ITR 84 and Burton Group Ltd v Smith [1977] IRLR 351.
The first of these was a decision of the Queen's Bench Division (constituted by Lord Parker CJ, Widgery J and O'Connor J), the second a decision of the UK Employment Appeal Tribunal (constituted by Arnold J and two members of the Tribunal). Both involved redundancy claims where the issue was whether the employer had terminated the contract on notice.
In the first case, the employer told the employee that the department in which he worked was to be closed and when that happened his services would not be required. The employee was told that the department would definitely be closed but the date had not been fixed. In the second case, the employee was told that his services would not be required after a particular date, but the employer reserved the right to bring the date forward. In each case, it was held that there was no valid notice of termination.
In neither of these cases did the employer do anything more than notify the employee that the employer intended to terminate his employment at some indeterminate date in the future. The cases do not, in my opinion, bear any close resemblance to the present one.
Ultimately the exercise of a power to terminate an employment contract must be governed by the principles which apply generally to the exercise of a contractual power by notice to the other party. The notice must of course comply with the relevant terms of the contract. Beyond that, the only requirement is that the notice must convey with a sufficient degree of clarity that the contractual power is being exercised: Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749 at 768.
Clause 19.1 expressly required termination on written notice. The clause did go on to refer to the three month notice period. But arguably that only specified when the termination would take effect. That argument is supported by the reference to the parties agreeing to a shorter date. Any such agreement would usually occur after notice of termination had already been given.
The critical part of Mr McMurchy's letter contained two sentences. The first sentence was an unequivocal notice of termination. Had that sentence stood alone, there seems no reason why it would not have been effective to terminate Mr McMurchy's employment at the end of whatever notice period was specified in his employment contract. Arguably, an incorrect identification of the notice period in the following sentence would not undo the effect of the first.
It was of course not necessary to make any final decision about this matter. But I consider that the strength of Employsure's case for a restraint under clause 18.2 is appreciably weaker after 14 March.
I turn to the balance of convenience. Imposition of a restraint would at least prevent, or at least delay, Mr McMurchy from taking up his desired employment with ELMO. On the other hand, Employsure would be paying Mr McMurchy his full contractual salary for his notice period. This does not completely neutralise the inconvenience to Mr McMurchy, especially as his salary with ELMO is higher. But in my view it significantly mitigates that inconvenience for the period of the clause 18.2 restraint.
In his affidavit, Mr McMurchy states that when he received the variation agreements he understood that Employsure was reverting to his 2015 contract terms. But this is likely to be disputed at a final hearing, and there is no independent evidence of it. On the material before me, the point was first raised by Mr McMurchy's solicitors after they became involved in the dispute in January this year.
In any event, it is undeniable that Mr McMurchy was, when he signed the 2018 contract, prepared to bind himself to a three month notice period (Mr McMurchy states in his affidavit that no negotiation of the terms was permitted, but duress is not argued). The need for parties to adhere to voluntarily undertaken contractual obligations is said to be a matter of particular significance in evaluating the balance of convenience: Hitech Contracting Ltd v Lynn (Supreme Court (NSW), Austin J, 5 June 2001, unrep) at [27]. It also appears clear, on the evidence before me, that at all times after the contract was signed, Employsure was operating on the belief that Mr McMurchy was subject to a three month notice period.
In these circumstances, I considered that Employsure had made out its case for a restraint under clause 18.2, at least up until 14 March. I will return to the form of the orders I made in due course.

Post-employment restraint

Employsure's case is based on clause 20 of the 2018 employment contract, which contains a restraint on Mr McMurchy being engaged as an employee in "any business or prospective business in competition with [Employsure] at the time of the termination of employment".
Counsel for the defendants contended that Employsure's case under clause 20 for a restraint after the clause 18.2 period expired was weak to non-existent. Counsel submitted that there was no element of competition in Mr McMurchy's new employment with ELMO. This was because Employsure only sold Bright to subscribers whereas ELMO's business involved selling software more generally. Counsel also pointed out that Mr McMurchy's position with ELMO is in sales not management. He has no previous customer contacts which he will be able to exploit for ELMO.
Counsel for Employsure responded that a restraint of this type was justified in protecting Employsure from unfair competition based on Mr McMurchy's position as what was described as a relatively senior employee. Counsel submitted that on the evidence, Mr McMurchy was privy to information about Employsure's business which could be of strategic value to a competitor. For his part, counsel for the defendants accepted that in theory the protection of confidential information could sustain a restraint of the present type, but submitted that on the evidence Mr McMurchy's employment at Employsure was insufficient to justify the restraint in the present case.
These issues were debated at length. It is also clear that once the clause 18.2 period expires then Mr McMurchy will cease to be paid and this will affect the balance of convenience.
In deciding how to resolve this aspect of the application, I thought it was significant that, under clause 20, whether there is competition between Mr McMurchy's employment with Employsure and the new employment with ELMO depends on the state of affairs as at the date of termination of his employment. On the prima facie view I have adopted for the purposes of this application, that date had not yet arrived when I heard the application (and was still at least five weeks away). Five weeks may not be a particularly long time, but it remained possible that commercial circumstances would change. I thought it undesirable to be issuing an injunction against a threatened breach which was so far in the future.
Furthermore, the effect of my decision on clause 18.2 is that Mr McMurchy will be restrained from working with ELMO until at least 14 March. If the launch is to proceed as expected, then ELMO will have to make other arrangements. This may affect the way in which the balance of convenience will be struck in the period after 14 March.
In these circumstances, I thought the better course was simply to make an order based on clause 18.2, extending up to 14 March, and to consider the balance of the application closer to that date. This will allow the parties to bring forward any further evidence they may have going to balance of convenience, and in particular evidence of events which have transpired since I made the orders on 8 February.

Orders

The orders of the Court on 8 February were: 1. Order that until 14 March 2021 or otherwise until further order the first defendant be restrained from performing any work or duties for, or at the direction of, the second defendant and from attending any workplace under the control of the second defendant. 2. Note the undertaking recorded in the form of order provided to the Court by email at 11.36am on 8 February 2021. 3. Direct that these orders may be taken out forthwith. 4. Adjourn the balance of the plaintiff's application for interlocutory relief to 4 March 2021 at 9.15am.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 24 February 2021

At a glance

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Judgment (6 paragraphs)

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Cases Cited (10)

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