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Litigation: 23 March 2019

In Earth Force Personnel Pty Ltd v E A Negri Pty Ltd & Anor [2010] VSC 426 (22 September 2010), Hargrave J was required to determine whether a condition that was included in a labour hire agreement was an unenforceable penalty and/or whether it operated as an unenforceable restraint of trade.

The case concerned Earth Force Personnel Pty Ltd ("Earth Force"), a labour hire company that supplied contract personnel on a casual basis. E A Negri Pty Ltd ("Negri") was a construction business which entered into a labour hire agreement with Earth Force. The relevant condition of the agreement required Negri to pay Earth Force an "introduction fee" in the event that it employed a worker who had been introduced to it by Earth Force. This fee was payable regardless of the time period or the position under which the worker would become employed.

In 2008, Earth Force placed a worker with Negri for a period of six weeks. The worker was then placed with another company for 10 weeks. Following the completion of the second placement, Negri offered the worker permanent employment.

Earth Force demanded that Negri pay the introduction fee, however Negri refused. Earth Force commenced proceedings in the Magistrates' Court to enforce the payment. Negri defended the claim, arguing that the condition to pay an introduction fee was void as it constituted an unenforceable penalty or an unenforceable restraint of trade. The Magistrate dismissed Earth Force's claim and found that the condition imposed an unenforceable penalty as well as operating in restraint of trade.

On appeal, Hargrave J held that the penalty doctrine had no application. The condition was, however, held to operate in restraint of trade. Hargrave J discussed the general principles of the restraint of trade doctrine, that all restraints of trade are prima facie void as contrary to public policy - unless the restraint the employer has a legitimate interest to protect, and the restraint imposed is reasonable to protect that interest.

Hargrave J found that the condition was a restraint of trade for a number of reasons, including:

  • The absence of a time limitation so the fee was payable regardless of the time of employment;
  • The absence of a limitation on the capacity in which the worker would be employed; and
  • The absence of a limitation on the length of direct engagement by Negri.

Consequently, this case illustrates that even an indirect restraint of trade may be held to be unenforceable.

Several recruitment agencies have similar clauses in their agreements and employers should be mindful that such clauses are unlikely to be enforceable.

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