James Warburton case highlights need for clear contracts to protect from employee defections: IR lawyers

Employment lawyers are poring over yesterday’s ruling giving new Ten Network chief executive James Warburton a starting date of January 1, 2012 – six months after Ten wanted, but 10 months before his former employer Seven Network believed he should be able to start.

The lawyers say the case highlights the importance of having rock-solid employment contracts to protect your business when a key employee leaves for a rival firm.

The NSW Supreme Court has ruled that Seven Media Group’s former sales boss can start work as Ten’s new chief executive on the first day of 2012. Ten, which is currently being led by News Ltd director Lachlan Murdoch, had originally told the market its new recruit would start in July.

Seven had sought to defer his start until October next year, arguing for a three months’ notice period from the end of his contract in July plus a 12-month non-compete clause.

Justice Michael Pembroke described Warburton as “clearly a redoubtable talent who is respected, sought after, and even fought over.”

“I should do no more than the minimum that is reasonably necessary to protect the plaintiffs’ legitimate commercial interests. And I should strive to limit the hardship to Mr Warburton,” Pembroke said.

“The unfortunate but necessary consequence of my orders is that he will be sidelined for the whole of the balance of calendar year 2011. If he becomes the chief executive officer of Network Ten from January 1, 2012, Mr Warburton may well represent a competitive threat to Seven, but this will not realistically be because of his retention of confidential information acquired by him at Seven prior to March 2, 2011, but because of his skill, talent, personality and past successful record in the industry.”

Industrial relations lawyer Peter Vitale says there are two key messages coming out of the case.

First, Vitale says the ruling suggests the courts will enforce an employee restraint where it’s considered reasonable to protect the employers’ interests.

Second, by sending a departing employee on gardening leave, the employer may effectively be starting the restraint period then because they’re isolating the employee from the business.

“In this case, there was a lot of focus on confidential information that Warburton had access to, and ultimately the Judge’s decision really turned on quite a thoughtful analysis on the point at which Warburton’s knowledge of Seven’s operations would effectively be historic, and no longer relevant,” Vitale told SmartCompany.

While Seven argued that Warburton should have restrained from starting at Ten until October next year – that is, 12 months after the three months’ notice – the Judge found the period of restraint should start in March, seeing that was when the former sales chief was isolated from Seven’s business.

“The judge has essentially said that Warburton’s signed up to management plan which provided generous benefits, and the flipside is he should abide by restraints,” Vitale says.

“The reality is Seven has managed to enforce their restraint to a significant degree, and by the time it’s all over, Warburton won’t have been involved with Seven’s business for 10 months, which the judge deemed was a reasonable time to protect Seven’s business,” Vitale says.

“The judge has been very careful to ensure that Seven didn’t get some sort of unreasonable or capricious benefit by allowing them to restrain him for an excessive period, and at same time balancing the rights of the employee.”

Hall & Wilcox partner Karl Rozenbergs told SmartCompany cases like this bring contracts front of mind, and many SMEs are starting to look at restraints, because they don’t always have dedicated HR teams to deal with these issues.

He says the trial underscores that restraints are enforceable, and if SMEs are serious about protecting their business when a key employee defects, they can put them to use.

He advises SMEs to look at their risk areas, and pinpoint particular employees who could hurt your business if they left.

“The best time to tackle this is when somebody starts,” Rozenbergs says, adding that when somebody leaves, there are often messy legal arguments about what information is confidential or company property.

Telling an employee that certain information is confidential strengthens your argument should a dispute arise, he adds.

But for key employees already on the books, he advises SMEs to offer a carrot such as financial reward in return for tightening up his or her contract.

“Be careful, if they’re an existing employee there needs to be some sort of consideration (payment) because it’s a new obligation,” he says.

Meanwhile, BBY analyst Mark McDonnell says while the court decision delivers certainty to Ten shareholders, it leaves interim chief Lachlan Murdoch hamstrung from pursuing major changes.

“The delay is not at all helpful,” McDonnell says.

He tips tweaking and cost-reductions rather than wholesale measures from a chief who’s not been involved with the company terribly long and already has plenty of activity on his books. As well as serving as interim Ten chief and as a director of News Corporation, Murdoch owns radio stations through his private investment business, Illyria.

“The place has had the broom put through it in terms of management,” McDonnell says, citing the departure of key players Grant Blackley, Nick Falloon, John Kelly and even one-time director James Packer.

“A lot of the strategies in place have been devised by a different board and management. Until the new CEO comes onboard, the big issues still need to be addressed.”