Post-employment restraints - do they work?

by Antoinette Daley - June 2012

At common law, post employment restraints of trade are prima facie invalid as infringing public policy. A restraint clause in an employment contract will be enforceable only if the restrictions imposed are no more than necessary for the protection of the employer's legiti-mate business interests.
 

What are legitimate business interests?

An employer has legitimate business interests in confidential information, customers and staff that are capable of protection. Without a specific contractual post employment restraint, a former employee is entitled to set up a directly competing business in the immediate locality, to approach the former employer's customers and to seek orders from them, to poach other employees and to use any information which they carried around in their head (such as the identity of customers and their product requirements).
 
A simple restraint that seeks to prohibit each of these activities per se, without considera-tion of the particular facts, will likely be held unenforceable. Careful thought needs to be given to each individual employment. In addition, it is important to review the restraint each time an employee changes roles to check whether the scope of the restriction is still relevant or requires amendment.
 

Is the restraint reasonable?

The reasonableness of the restraint must be decided at the date of entering into the employment contract. For this reason, it is important that the parties to the contract each have an opportunity to negotiate the terms of a restraint. Further, employees should be encouraged to seek legal advice about the length and the effect of the restraint.
 
Restraints are often applied for a specified period, in relation to a particular geographic area. A common device for reducing the risk of invalidity on the ground of unreasonableness is to include a 'waterfall' clause, which is so-named because it contains a number of varying periods of time and geographical constraints as alternatives. This enables a court to sever those combinations that it considers unreasonable without invalidating the re-straint entirely.
 
Also relevant is the character of the business and an employee's connection with it. Client connection is often an issue for senior staff, but can also arise in circumstances where there is a continuing or recurrent relationship such as in accounting firms. The Victorian Supreme Court of Appeal recently upheld a non-compete restraint in the contract of employment of an employee accountant. The employer accounting firm successfully argued that it had a legitimate interest in protecting the goodwill which developed as a result of its employees performing accounting services. In the event of a breach the employment contract provided for payment of liquidated damages, which resulted in the former employee being ordered to pay its former employer the sum of $188,495 plus interest accrued.
 
Amounts paid to an employee in consideration for the restraint may also be relevant to reasonableness of the restraint. Such a payment was one of the key reasons for the Federal Court of Australia recently finding that a two-year restraint period was capable of en-forcement against a former co-founder of a human resources outsourcing company.
 

Check your employment contract

If you are a business and rely on standard employment contracts or an employee about to leave or start employment under a contract where a restraint applies, contact us to review the restraint and provide you with advice about its enforceability.
 
Antoinette Daley
Lawyer
 


Findlaw

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