Employee Restraints

Who owns your customers?

There will be times when an employee leaves your business and you find out later that several significant customers have followed them to their new employment or business.

What can you, as a former employer, do in these situations?

The starting position is that after your employee ceases to work for you, they are largely free to compete with you for customers – including your existing customers.

However, this general rule is subject to a number of important exceptions.

The first is that your employee must not take any actions in ‘preparation’ for their departure while they remain employed by you.  If your ex-employee has taken steps prior to leaving that are against your interests, then you will be able to recoup from them any benefit or gain they may later make from those actions.

Secondly, your ex-employee must not use any confidential information or commercial opportunities they were exposed to while employed by you to benefit themselves after ceasing to work for you.  The classic example here is when an ex-employee takes a copy of your customer list, or other confidential financial information.

Finally, your ex-employee will be bound by any valid post-employment ‘restraint’ provisions that they may have agreed to in their employment contract.  A well-drafted employment contract with appropriate restraint provisions will ultimately be your best defence against customer poaching by your ex-employees.

Whilst post-employment restraints were, at one time, usually seen only in employment agreements for executives, they are becoming increasingly common in modern employment agreements at all levels. This is a reflection of the fact that more and more employees are gaining exposure to valuable customer relationships and IP. As such, post-employment restraint enforcement and disputes are also increasing.

While the Courts are not prepared to unnecessarily restrict a person’s ability to earn their livelihood, the Courts are increasingly willing to protect an employer’s interests where the employee breaches a reasonable post-employment restraint provision, such as a prohibition on enticing or soliciting the business of your customers for a period after employment.

Every case ultimately turns on its own unique set of facts, however a number of recent decisions by the NSW Court of Appeal indicate that solicitation and enticement may occur when the ex-employee takes “any step or action” in attempting to secure a client away from the employer.

In one instance, the NSW Court found that certain conduct constituted solicitation by the ex-employee, despite the fact that the ex-employee was first approached by the client. That said, if a customer (for whatever reason) has already decided to cease using your services before deciding to take their business to your ex-employee, the fact that the client then takes their business to the ex-employee may not amount to solicitation.

We strongly suggest that you carefully review the restraint clauses in your employment contracts to ensure they will enable you to take decisive enforcement action, when necessary.

For help on drafting or reviewing your employment contracts, or for assistance in enforcing a restraint clause, please call us on 1300 654 590.

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Published by

Andrew

Lawyer to entrepreneurs and investors

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