Restraint

Edward Mallett sold Employsure for a pleaded $180 million and, its buyer says, a promise not to come back. Sixteen months later came Retinue, run by Employsure’s former finance chief. It lost $38.9 million and died. The lawsuit is in rude health.

Every employment lawyer in the country knows the restraint of trade clause. It is the paragraph near the back of the contract that says what you may not do after you leave. It is argued over in court constantly, it is written by people who charge by the hour, and small business owners ring advice lines at all hours to ask what theirs means.

For most of the 2010s, one of the best known of those advice lines belonged to Employsure. Its founder was a former London employment barrister named Edward Mallett.

In Cost of Sales, Unaudited set out how Retinue Accounting lost $38.9 million without once making a gross profit. In First in Line, it set out whose money that was, and who stands at the front of the queue for what is left.

This is the part of the story that begins before Retinue existed: a sale, a set of promises attached to it, and a lawsuit that has now outlived the company it was about.

Everything that follows about the lawsuit is an allegation. No court has found that anyone breached anything. The case has not been tried. It has, however, been running for a long time.

The Model

The Federal Court has recorded Mr Mallett's background in his own evidence. He was Employsure's managing director from its incorporation in September 2010. Before that he was a barrister in London who specialised in employment law, having studied at Cambridge and taken a master's degree at Duke.

In Australia, the judgment records, he "saw an opportunity to develop a business model here based upon that operated by Peninsula Business Services Limited", a British firm selling employment advice to small businesses on subscription. Peninsula agreed to invest in Employsure. By May 2019, Employsure had about 20,500 clients and more than 600 employees.

The model was not complicated. A small business paid a monthly fee, under a contract that could run for years, and in return could ring for advice on awards, contracts, dismissals and safety whenever it liked. The contracts, as described in evidence before the Federal Court, ran for terms of up to five years, renewed automatically unless notice was given, and made the outstanding balance payable if the client stopped paying.

Readers of Part 1 will recognise the shape. One number, every month, for years.

The model also had a sales machine attached. Between 2016 and 2018, Employsure ran Google advertisements with headlines such as "Fair Work Ombudsman Help – Free 24/7 Employer Advice". The ACCC sued. Employsure won at first instance on every claim, including the ACCC's claim that its contract terms were unfair. The ACCC appealed on the advertisements alone. The Full Federal Court found six of them misleading, in that they conveyed an affiliation with government that did not exist, and the penalty was eventually set at $3 million.

The challenged terms survived. The advertisements did not. The business grew either way.

The Sale

What happened next is drawn from the pleadings in the NSW Supreme Court, as summarised by the judge. They are Peninsula's allegations. They have not been proved.

Peninsula alleges that before December 2020, EWHM Pty Ltd, as trustee for the Mallett Family Trust, owned 35 per cent of Employsure and Peninsula owned the rest. On 17 December 2020, it says, EWHM sold all of its shares to Peninsula under a share purchase agreement.

The pleaded price was $180 million. Mr Nicholson, then on Employsure’s board, describes it on his own profile as “a $200M revenue business”.