Client lists are integral to an accounting practice’s goodwill. Quite rightly, practices will go to great lengths to protect such lists from competitors. But sometimes, those competitors come from within. The recent case of Oakwood Partners v Li (ACN 656 077 020 Pty Ltd v Li (No 2) [2024] FCA 964) (Oakwood Partners v Li) is a fresh reminder of what can go wrong when employees later become competitors.
In this article, we outline:
- the options available to practices to protect their client lists under employment law; and
- the additional professional and ethical obligations placed on employees when registered under the Tax Agent Services Act 2009 (TASA).
The case in the Federal Court
In Oakwood Partners v Li, the Federal Court granted an injunction restraining an accountant, Ms Li, and her new practice, MLI, from soliciting or dealing with clients of her former employer, Oakwood Partners. Ms Li resigned from her position as a director and accountant of Oakwood Partners. It was then alleged that, a few weeks later, Ms Li was soliciting clients of Oakwood Partners to join her new firm. She was offering to perform the same accounting services as Oakwood Partners at a discounted rate.
Employment law considerations
Employers commonly include restraint of trade clauses in employment contracts which seek to prevent an employee from competing with the employer once the employment relationship ends.
Despite their common use however, in most Australian jurisdictions restraint of trade clauses are generally considered by the Courts to be void on the grounds that they are contrary to public policy.
In order for a restraint of trade clause to be enforceable, an employer must demonstrate that:
- the employer has a legitimate protectable business interest; and
- the restraint is reasonable for the protection of the legitimate business interest.
It is important, therefore, to ensure that restraint of trade clauses go no further than what is reasonably necessary to protect an employer’s legitimate business interests.
Factors that the Courts will take into account in considering reasonableness include the specificity of the restraint, the time period for which the employee is restrained and the geographical limit of the restraint. The Courts are also more likely to consider a restraint of trade clause to be reasonable where it applies to a senior employee, or to an employee whose role is largely a client facing one.
Generally speaking, a client or customer list will be held to constitute a legitimate business interest that is capable of protection by way of an injunction and/or damages in circumstances where an employee has taken a client list without authorisation, and they are using or attempting to use that list to solicit clients of their former employer for themselves or for a competitor of their former employer.
In addition to contractual restraints, employers also have statutory protections available which can be relied upon if they are breached by an employee. In particular, the Corporations Act 2001 (Cth) provides that:
- a director, officer or employee of a company must not improperly use their position to gain an advantage for themselves (or someone else) or cause detriment to the company; and
- a person who obtains information because they are or have been a director, officer or employee of a company must not improperly use the information to gain an advantage for themselves (or someone else) or cause detriment to the company.
Breach of these statutory obligations can result in significant civil penalties being imposed by the Courts and are therefore useful in strengthening an employer’s position where there is an apparent breach of a former employee’s obligations.
TASA considerations
The additional professional and ethical obligations placed on employees when registered under the TASA mean that they should think twice before taking client lists from their former masters.
Although there are no rules under the TASA expressly stopping employees from taking clients lists and soliciting clients from their previous employers, professional and ethical obligations can capture such conduct. The Code of Professional Conduct under the TASA requires employees registered with the Tax Practitioners Board (TPB) to:
- act with honesty and integrity;
- maintain the confidentiality of a client’s details; and
- uphold and promote the Code of Professional Conduct, and not engage in behaviour that could undermine public trust and the integrity of the tax profession.
Similar rules apply to employees under the By-Laws of professional accounting bodies.
Breaches of these professional and ethical obligations could cause the TPB or the professional accounting bodies to apply sanctions, including written warnings, forfeiture of membership, termination of registration, and other orders.
Next steps
We recommend that employers have clear agreements and policies in place with their current employees to protect their client lists and their accounting practice’s goodwill. This should also include clear off-boarding policies. All of these agreements and policies should also be in writing and should go no further than what is reasonably necessary to protect the employer’s legitimate interests.
We can assist employers with drafting protective restraint of trade clauses and provide immediate advice where there may be a suspected breach of a former employee’s post-employment obligations.
This article was written by Tony Lawrence, Partner, Vincent Licciardi, Partner, Mark Muntz, Solicitor and Aidan Del Socorro, Solicitor.
