Over the years business owners have caught on to the amount of value that resides in the people who work in their business, and the amount of damage those people can do when they leave.
Post-employment restraints were, at one time, usually seen only in employment agreements for executives. Increasingly, we have found that business owners are looking to put appropriate post-employment restraints into all their employment contracts to prevent their ex-employees from wreaking havoc after they have left. But that begs the question: what is an ‘appropriate’ restraint, and is there a ‘one size fits all’ option?
But firstly, back to basics. A restraint of trade is any contractual term that seeks to restrict the freedom of a party to engage in an activity, e.g. running a business. A post-employment restraint is a contractual term that comes into effect after a person’s employment ends. Usually, post-employment restraints will seek to prevent an ex-employee from using contacts gained during their employment to compete against their former employer (for example, by preventing contact with existing customers, suppliers or continuing employees of the former employer).
While the Courts are not prepared to unnecessarily restrict a person’s ability to earn their livelihood, the Courts are willing to protect an employer’s interests where the employee breaches a reasonable post-employment restraint provision. The key word here is ‘reasonable’: the default position at law is that restraint of trade clauses are unenforceable and void, unless they can be shown to be ‘reasonable’ in the circumstances. Importantly, the party seeking to impose the restraint has the onus of proving reasonableness.
The intentions of the parties and their relative bargaining power will not be relevant to the question of whether a restraint is held to be reasonable. It either is, or it is not, regardless of what the parties thought at the time they agreed to it.
From the Courts’ perspective, the underlying purpose of a post-employment restraint must be to protect the employer’s legitimate business interests. Given the amount of access that an employee has to customers, intellectual property and other confidential information of an employer, they are well placed to compete against their former employer in a very damaging way. As such, the Courts are willing to uphold restraints when they go no further than necessary to protect the employer’s goodwill. The Courts look at three factors when they determine whether a restraint is reasonable: (1) the activities the restraint applies to, (2) the duration of the restraint, and (3) its geographic area.
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.
ACTION NOTE: 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.
3 Common Traps:
Trap #1: One size does not fit all. This doesn’t work because what is reasonable for one employee might not be reasonable for another. Each restraint clause should be tailored for the particular employee, appropriate for their level of experience, seniority, remuneration, client access, etc. If a senior executive in your business could do a lot more damage when they leave than an administrative assistant, then it is simply not appropriate for them to have matching post-employment restraint obligations.
Trap #2: How long is too long? Many restraints we see in employment contracts have a standard restraint period, such as 12 months from the date of termination of employment. While it is important that the restraint is limited to a clear period (so that it is not open-ended), a reasonable length of time will be limited to that which is necessary to protect the employer, and nothing more. In some cases this will be 12 months, but in other cases it may be only 3 months. For example, it will take longer for a sales manager who had regular and ongoing client contact to lose their connection with a former employer’s clients than the IT manager who had limited, if any, client contact. Accordingly, the Courts would expect that any ‘non-solicitation of clients’ restraint clause period for those employees would reflect the level of connection each employee had with the business’ clients.
Trap #3: Failing to get legal advice. This one works both ways. You should get legal advice on your restraint clause as the employer, and you should encourage your employee to get legal advice on what the restraint will mean for them. If both parties have an informed view of the restraint, it will help to ascertain the reasonable scope of the restraint. If you later seek to enforce the restraint against the employee, evidence of legal advice and any negotiation of the restraint scope will be helpful evidence for the Court in determining its reasonableness.
3 Top Drafting Tips:
Tip #1: Give honest consideration to the nature of the goodwill you are trying to protect. If protecting your client base is your aim, consider the nature of your goodwill. Is most of the custom a consequence of specific employees, the employer’s specialised knowledge, its established business reputation or the fact that it is conveniently located? Those considerations will assist you in deciding whether the restraint should be more or less restrictive in terms of the restraint activities, the restraint area or the restraint period.
Tip #2: Use a ‘cascading’ restraint clause. You might have seen a restraint of trade clause in a contract which sets out alternatives. For example, it might say that a party cannot compete within a radius of 2, 5 or 10 kilometres, for 6 months, 1 year or 2 years. The reason clauses are drafted this way is because a court cannot “read down” a restraint clause. That means, if the restraint is unreasonable it will be struck out entirely, not replaced with something more reasonable. If however alternatives are stated, the court can strike out the unreasonable alternatives but leave the reasonable ones in place. In the above example, the court might decide that 5 and 10 kilometres and 2 years are unreasonable, but uphold the restraint for 2 kilometres and 1 year.
Tip #3: Be reasonable and realistic. You should not try to incorporate the most restrictive clause possible just because you have the ‘upper hand’ in preparing the employment contract. In fact, the likely outcome is that the restraint will not be upheld because it is too onerous on the employee. Instead, you need to be realistic about the amount and nature of the damage the employee could do once they leave your business. This should take into account factors including the nature of your business, where your business operates, and the volatility of your particular industry. This will help you to properly frame the restraint activities.
For help drafting your employment agreements and restraints, call us on 1300 654 590.
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