What to bear in mind when a senior manager resigns

Managing the resignation of a senior employee who wishes to join a competitor is a challenge for any employer. The employer wishes to protect its own interests, including its confidential information and its client base, but of course, the employee’s movements cannot be restricted entirely.

In Harden v Willis Australia Group Services Pty Ltd [2021] NSWSC 939, Sackar J of the Supreme Court of New South Wales considered a number of these issues.

Facts

Mr Harden had worked within the Willis Towers Watson Group of Companies for 30 years, most recently as President of Willis Reinsurance Ltd (Willis Re), a reinsurance broker in the pacific region. In March 2020, it was announced that AON would take over Willis’ Australian operations. Mr Harden considered that AON’s culture did not align with his values and declined to work for them. Accordingly, on 26 June 2020 he resigned from his employment.

Mr Harden intended to commence employment with Guy Carpenter, a significant competitor of Willis Re. However, due to his seniority, his employment contract had a 12 month notice period for his resignation. Willis Re stated that Mr Harden would continue to work through his notice period (albeit from home due to the COVID-19 pandemic) but took possession of his electronic devices and access to the information technology system. He could only perform duties he was expressly directed to perform. Mr Harden was also directed to tell any Willis Re clients who contacted him, ‘I’m sorry I cannot assist you because I am on leave… There’s nothing further I can say at this time.’ Mr Harden objected to this direction as he felt he was being directed to lie to clients.

After AON’s takeover, several other Willis Re employees also resigned and indicated they intended to join Guy Carpenter.

Mr Harden sought declarations that Willis repudiated his employment contract (in directing him to lie and say he was on leave) and/or suspended him from carrying out his duties. He also sought a declaration that the restraint of trade clause in his employment contract was invalid. Willis sought injunctions to restrict Mr Harden from soliciting business from Willis Re or using confidential information. The key issues which arose in the proceedings were:

• whether, in directing Mr Harden to lie and say he was on leave, Willis repudiated the employment contract with Mr Harden (Issue 1);
• whether Willis suspended Mr Harden during his notice period (Issue 2);
• whether the restraint on trade imposed on Mr Harden beyond his notice period was lawful (Issue 3);
• whether any orders should be made against Mr Harden in relation to Willis’ confidential information (Issue 4);
• whether Mr Harden unlawfully solicited employees of Willis to leave their employment (Issue 5); and
• whether Mr Harden unlawfully solicited clients of Willis (Issue 6).

Decision

Issues 1 and 2

The Court found that Mr Harden was, in fact, not on leave during his notice period. He had been heavily restricted in what he could do, which effectively resulted in him being suspended from his usual duties. This action was, in substance and in form, disciplinary in nature.

Willis Re had clearly entered damage control and sought to minimise the impact of Mr Harden’s resignation on its clients. While Willis Re had reasonable commercial motivations in directing Mr Harden to tell clients he had taken leave, Sackar J was of the view that Willis Re’s direction was ‘not consistent with compliance with honest standards of conduct’ and a breach of an implied contractual term to act in good faith.

However, the breach of the term did not amount to repudiation of the employment contract. The threshold required to prove repudiation is a high one, and Willis Re’s conduct did not appear serious enough to be ‘substantially inconsistent’ with its obligations under the employment contract. In any event, Mr Harden’s resignation was an open secret within the insurance industry, and he was not actually required to tell any untruth to clients.

Issue 3

Mr Harden’s employment contract included a 12 month restraint clause which took effect after the conclusion of the 12 month notice period. The parties agreed that, based on Mr Harden’s level of seniority and connection with clients, some period of restraint was reasonable. However, Mr Harden argued, and Sackar J agreed, that the effective restraint period of two years was unreasonable.

Sackar J held that Mr Harden was entitled to use his experience and know-how, even in competition against Willis Re, particularly as he was ‘towards the end of his working life.’ Willis Re may have been understandably concerned about those skills being provided to a competitor, however, Mr Harden was still entitled to work in a ‘stimulating and remunerative employment.’

Issue 4

Willis Re rightly asserted that Mr Harden had access to confidential information throughout his employment, however, there was no evidence that Mr Harden held any physical confidential information after Willis Re took possession of his electronic devices and other documents in July 2020. Any confidential information to which he had access was retained in his head and was likely to have changed since he effectively ceased working in July 2020. Further, Willis Re failed to provide sufficient evidence to suggest that Mr Harden intended to use any of that information unlawfully. Therefore, the Court declined to make any orders in relation to Mr Harden’s use of confidential information.

Issues 5 and 6

Willis Re asserted that Mr Harden had persuaded employees to resign from Willis Re, and clients to follow him to Guy Carpenter, but failed to provide sufficient evidence to prove their case.

In relation to the employees, it appeared that the targeted employees were fairly high profile within the insurance industry and would have been known by relevant persons at Guy Carpenter. The recruiter engaged by Guy Carpenter appeared to ‘outwit’ Willis Re and identify those employees who were ‘ripe for persuasion.’ Any suggestion that Mr Harden was involved in their identification and recruitment was mere ‘conjecture’ particularly in circumstances where Mr Harden’s move to Guy Carpenter was an open secret.

In relation to the clients, Willis Re identified numerous communications between Mr Harden and key clients which it said were made with the intention to solicit them, however, Willis Re provided no evidence to suggest that the communications were for anything other than reasonable business purposes.

Ultimately, Sackar J found that Mr Harden had been suspended, that the direction to lie was a breach of an implied duty to act in good faith in an employment contract, and that the restraint clause was unreasonable and was effectively exhausted at the end of the 12 month suspension/notice period. The other claims were not made out. Sackar J invited the parties to prepare orders reflecting the decision.

Take home messages

This case is a reminder that a well drafted employment contract is crucial for any employee, but particularly for those in senior management positions who are likely to hold significant sway over employees and clients, as well as access to confidential information.

Importantly, having a restraint of trade clause in an employment contract must be reasonable and protect the employer’s legitimate business interest. If a restraint clause is excessive, then it is possible that a Court will find that it is unenforceable.

For more specific information on any of the material contained in this article please contact Ganesh Krishnan on + 61 8217 1395 or gkrishnan@normans.com.au, Anastasia Gravas on + 61 8 8210 1331 or agravas@normans.com.au, or Annabelle Narayan on +61 8 8210 1292 or anarayan@normans.com.au.