Can post-employment restraints protect your business?
Friday, March 16, 2007/
Putting a restraint clause in an employee’s contract is a good idea — in theory. It is a lot harder to make it work. By PETER VITALE of VECCI.
By Peter Vitale
Including a post-employment restraint clause in an employee’s contract will rarely stop key employees defecting to the competition but, properly done, they can help.
A series of recent cases highlights the need to ensure that restraints are up-to-date, relevant and reasonable. And they emphasise the need to pay attention to the details and not the mythology. Often, it’s the circumstances surrounding the end of the employee’s employment and the identity of the new employer that determine whether the clause will be enforced.
As a strict matter of law, clauses restraining free trade are against public policy and will not be enforced. When the courts will make an exception to this rule is where the restraint does not restrict the employee beyond what is reasonable to protect the employer’s genuine business interests.
The interests of the business are usually identified by reference to one or both of two factors. First, the relationship between the employee and customers of the business can be a critical aspect of the goodwill in the business. Second, the business is entitled to prevent an employee abusing confidential information belonging to the company.
Australian courts are prepared to prevent employees breaching obligations that clearly and reasonably protect at least one of these interests.
Three common means of protecting these interests are:
- Prevent the employee from disclosing confidential information to a future employer.
- Prevent the employee from trying to entice customers from his or her former employer to the new employer.
- Prevent the employee from accepting any work that would put him or her in competition with the employer.
Whether these restrictions reasonably protect the employer’s interests will be judged on the basis of whether the time period for which they apply, the geographic area that they cover, and the actual activities they limit are not too onerous having consideration to the particular case.
In the case of Brinks Australia v Kane, the employee had signed a contract with all three types of restrictions which, in simple terms, stopped him from doing any of those things for a period of three months from the end of his employment. There was clear evidence, including extensive emails, that Mr Kane had both sent confidential information to and attempted to entice customers to his new employer while still employed by Brinks.
The New South Wales Supreme Court had little difficulty granting an injunction against Mr Kane about a week after he had joined his new employer.
By contrast in Woolworths v Banks, the same judge refused to give an injunction to Woolworths to prevent a senior employee working for Myer. There was an extensive restraint provision that prevented the employee competing with Woolworths for a period of six months. A similar clause had been successfully enforced by Woolworths in an earlier unrelated case.
The court decided that Woolworths’ “Big W” stores were not really in competition with Myer. On that basis the employee could not be legitimately restrained.
Contrast these decisions with the Supreme Court of Western Australia decision in Sear v Invocare. In that case the court decided that a restraint period of five years was too long to be reasonable to protect the interests of the business. The clause was declared unenforceable.
Restraints of trade can be tricky but are worth getting right. Drafting them is a technical exercise, but as a starting point make sure you have a clear understanding of what restraint would be reasonable and relevant considering:
- What makes your business tick, and how it ticks.
- What you employ the employee to do.
- Who exactly your competition are.
The lesson for employers? Don’t ever use a “vanilla” restraint of trade clause. Give it some serious thought and get advice. The real test is not whether you might be annoyed that the employee has left; it is whether there is a genuine business interest to protect.
The art of business drinking: How to make deals, networks and friends Ian Whitworth Scene Change co-founder
Bridging the gap: Why regular customer surveys are key to good business Sonia Majkic 3 Phase Marketing co-founder
Six reasons every workplace should have a resident dog Michael Tiyce Tiyce & Lawyers principal
How we created an engaging online course with a 91% completion rate Emma Green Your CEO Mentor co-founder
Five things to consider before you launch a family business Monique Bolland Nuzest co-founder
Why Australian businesses are the new owned media moguls Jonathan Hopkins Marketing