Post-Employment Restraints of Trade: Tips for Both Employers and Employees

 

27 March 2017
Posted by Jennifer Tutty and Matt Hughes (Studio Legal intern)

 

Restraints of trade: often buried in the fine print of an employment agreement, these little clauses suddenly spring to life and become all-important when the employee/ employer relationship comes to an end.

Employees seeking our advice on this issue often tell us they simply want to move on and not be restricted from using their skills and knowledge in a new role. From the employer’s perspective, the biggest concern we often hear is that they want to ensure their brand and business is not going to be damaged by the employee’s departure.

An unenforceable restraint of trade is in nobody’s best interests. That’s why it’s important to ensure that both the business and the employee in question are clear on what their employment contract does, and doesn’t, permit after employment, and that the agreement is signed with the full knowledge of both parties.

What is a restraint of trade clause?

A restraint of trade clause is a term commonly embedded in employment contracts or shareholding agreements that aims to protect the employer or company’s interests by controlling what an employee or shareholder can and cannot do after they leave their position or sell their shares.

In this blog, we focus on employment agreements. (Stay tuned for part two, where we explore shareholder agreements.)

Employment contract restraints typically attempt to restrain the employee from competing against the employer, “poaching” clients, working for a competitor or enticing other employees to leave their current position and join the employee. They will generally operate for a specified period of time post-employment.

This area of the law is wildly uncertain, so it is important to check with us whether your clause will be enforceable, or whether you will be bound by your clause before you take steps to contravene it.

When will a restraint of trade clause be enforceable?

The law starts from the general position that restraints of trade are void because they are contrary to public policy: in other words, there is a strong public interest in people being freely able to use their own skills and knowledge to be gainfully employed in their chosen field. The onus is then on the employer to demonstrate that the restraint is in fact enforceable, because it is reasonably necessary to protect the employer’s legitimate business interests. Restraints can do no more than is reasonable to protect the legitimate interests of the employer – and the courts have repeatedly held that it is not sufficient for the employer to simply want to stop competition.

So what does “reasonably necessary” mean?

Reasonableness is determined at the date of the contract commencing. There are a number of issues to be considered in assessing the reasonableness of the restraint:

(a) the protection sought;

(b) the geographical area covered by the restraint clause;

(c) the duration of the restraint; and

(d) the acts covered by the restraint.

It’s very common to see “cascading” restraint clauses which start from a very broad position (say, the restraint applies for 12 months post-term throughout Australia) which drops down by increments to a narrow position (say, 3 months in the CBD of Melbourne).

The idea behind a cascading restraint is that if the employer has been too greedy with their preferred restraints and they are deemed void, only those unenforceable restraints will be severed from the contract, leaving the narrower restraints still operative. Cascading restraints are notorious for creating uncertainty for employees. (It can be extremely tricky to try to work out what a court would deem enforceable in your particular situation and we would strongly recommend seeking legal advice before deciding to contravene a restraint clause.)

What are “legitimate business interests”?

Generally, the courts have been willing to accept the following kinds of business interests as legitimate:

(i) Protection of confidential information

The mere fact that a former employee has had access to confidential information might not be, in and of itself, sufficient to justify a restraint. However, if the former employee was a key figure and had access to a large proportion of the employer’s confidential business information (such as sales figures, margins and client retention strategies) then they may be restrained from joining a competitor.

(ii) Protection of customer connections and goodwill

Where the nature of the work is heavily reliant on client relationships such as industries or services where the employee has the opportunity to develop a personal relationship with the client and acquire knowledge and understanding of the client’s affairs (i.e. accounting, legal firms), this is a legitimate interest the court will consider.  The appropriate and reasonableness for the duration of a restraint of trade clause depends on how long it would take a reasonably competent replacement employee to show his or her effectiveness and establish a rapport with customers.

What should I look out for?

What are some examples of restraint of trade clauses that have been held to be unenforceable?

(a) In one case, the clause sought to restraint an employee from providing services to any client he had contact with during his employment, for 12 months following his termination. Here, the court found that this clause sought to sterilise employee’s skills and was invalid.

(b) In another case, the clause prohibited the employee from working ‘in any capacity’. This was too wide to be enforceable: it essentially meant that a customer service specialist could not take a job in any capacity with a competitor (even in a completely unrelated role)) or even buy shares in a competitor.

What types of clauses have been found to be enforceable?

(c) A typical post-employment restraint clause that will be upheld by Australian courts seems to range between three and twelve months. The facts applicable to the specific restraint will determine what end of the scale the court will find is ‘reasonable’.

(d) In one case, a clause that restrained a former employee from being employed with a competitor for a term of two years was upheld by the Federal Court. This length of time was found to be necessary largely due to the fact that the former employee had access to almost all of the employer’s confidential business information (sales and client retention strategies etc) and was a key figure within the organisation.

Conclusion

Knowing whether you’re restraint of trade clauses will be upheld in the event of a dispute is tricky. If you need assistance with understanding a restraint of trade clause that may affect your future employment, or you are looking to restrain key personnel from adversely affecting your legitimate business interests once they leave your employment, please contact Studio Legal on 03 9521 2128 or hello@studiolegal.com.au for a thorough discussion.

DISCLAIMER

The information in this article is of a general nature. It does not constitute formal legal advice, and should not be relied on as such. Please see the full disclaimer in our website terms. Please contact Studio Legal if you are seeking advice about a specific legal matter.