The risk of funding an employee's legal case

Earlier this week, the NSW Supreme Court ordered costs against a company who funded an employee’s legal fees associated with opposing an injunction commenced by the employee’s former employer. HRX sought to restrain the employee from working with a competitor; Talent2.

Despite not being a party to the proceeding, Talent2 agreed to pay the employee’s litigation costs to defend the action. This financial assistance continued until Talent2 learned that the employee had taken confidential information from HRX. After Talent2 withdrew its funding of the case, and after the court found that the restraint was reasonable, the employee submitted to the restraint orders sought by HRX.

Ordinarily the employee, as the unsuccessful defendant, would have been compelled to pay HRX’s costs of the action. However, Chief Justice Bergin took the unusual step of ordering Talent2 to pay the litigation costs of HRX, even though Talent2 was not a party to the proceeding.

The Chief Justice was satisfied that without Talent2’s funding, the litigation was unlikely to have occurred. She also reasoned that Talent2 sought to gain a commercial benefit from financially supporting the employee, as it would be able to retain the employee’s services. It would also signal to HRX (a direct competitor of Talent2) and its employees that it would “stand up to” litigation commenced by HRX.

The Chief Justice found that Talent2 had employed the former HRX employee for three months “ without apparently making the inquiries into his conduct that it made once the litigation was threatened.” Talent2 had known since August 2012 that the employee had forwarded HRX confidential information to his personal email address.

Because of this, Justice Bergin explained that it was “ incumbent upon employers who effectively poach their competitors' employees to ensure that those employees are not acting in breach of their obligations to their former employers, particularly where the consequence of such breach is a benefit to the new employer.

She continued that where a “ new employer ‘stands up to’ and funds litigation brought by the former employer against its new employee in circumstances where there are breaches of obligations owed to the former employer, the new employer may be at risk of an order being made against it ”.

The case serves as an important warning for employers and HR professionals to be wary of:

  • the extent of any contractual restraint obligations with the employee’s previous employer;
  • funding a new or prospective employee’s legal costs in a dispute with his or her former employer; and
  • new employees using or providing their former employer’s confidential information.

If you require specific advice in relation to restraint of trade issues, please contact:

Rohan Kux
03 9611 0107