No, a recent decision of the Federal Court of Australia has confirmed.

In Informax International Pty Ltd v Clarius Group Ltd [2012] Clarius, a labour hire company, supplied the services of an IT contractor through her own company Informax, to Woolworths. The contract between Clarius and Informax restrained her from working directly for Woolworths for six months post-termination.  There was also a separate supply contract in place between Clarius and Woolworths which barred such an appointment for 12 months. Immediately after the last contract extension with Clarius ended, the contractor started to provide her services through Informax directly to Woolworths. When Clarius notified Woolworths of the breach of the restraint clause, Woolworths terminated Informax’s services.  It in turn challenged the validity of the restraint and claimed damages from Clarius.

The Court has now held that only a four week restraint was reasonable, not the 6 months provided for.  The contractor was not an employee and, given the very nature of independent contractors, they should be subject to shorter restraint periods. A shorter period of restraint was also reasonable bearing in mind that neither the individual contractor nor Informax held any confidential or commercial information regarding Clarius.   The obvious message for end-users of agency staff is not to put them in sensitive or client-facing positions where the inability to impose employee-type covenants will leave them “employer” exposed when they leave.

The important point to note for labour hire companies is that the Court said that as Clarius had incurred no costs in training the Contractor, “opportunistic disintermediation” (better known as “trying to cut out the middleman”) was in the Court’s view a “a mischief which is to be avoided rather than an interest to be protected”. This could be taken to overlook the point that the supply of labour is the whole life-blood of companies like Clarius and therefore that they will inevitably wish to protect the individuals and personal service companies like Informax as the nearest they get to their assets, and not so much from the confidentiality perspective.  Perhaps Clarius’ case would have been stronger if it could show that it had invested substantial time and money into collecting, training and retaining its stable of consultants.  Further, because the contractor was unaware of the lengthier restraint between Clarius and Woolworths, the contract between Clarius and the contractor was unfair under the Independent Contractors Act 2006 (Cth). This case is still continuing through the courts on the question of retrospective relief and variation of contractual terms under this Act, but so far it has been heralded as an important victory for independent contractors even just for its reviving that Act.

In 2013, Squire Sanders is presenting a series of webinars focusing on restrictive covenants around the globe. On 7 March 2013 our featured countries are Australia and Japan. Anna Elliott, Dominique Hartfield, and Sayaka Kasahara will discuss:

  • What business interests can a company protect?
  • How to make your contract terms stick.
  • Remedies – what can you do if ex-employees breach their restrictive covenants?
  • What effect has the growth of social media had on restrictive covenants?
  • A practical case study – tips for protecting your business.

 You can register for the webinar now.