WORKPLACE LAW
Post-employment restraint considerations when moving on MOLLY SHANAHAN, LAWYER, FINLAYSONS LAWYERS
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mployment contracts quite commonly include contractual provisions which limit an employee’s ability to do various acts and accept employment with other employers once their employment comes to an end. Despite their high use in employment contracts, post-employment restraint clauses are controversial and can often be difficult to enforce. Post-employment restraints, if not provided in an employment contract, could also be implemented through an agreement or deed executed by the employer and employee either at the commencement of employment (separate to the employment contract) or throughout the employment (such as when being promoted). Post-employment restraints clauses can vary considerably and may include restraining an employee from: • using confidential information gained through employment with the former employer; • working in the same industry as the former employer; • working for a direct competitor of the former employer; • carrying on activities the same or similar to those activities performed whilst working for the former employer; • communicating with or doing work for customers / clients of the former employer with their new employer; • encouraging employees of the former employer to leave their employment and take up employment with a new employer; and • commencing their own start up business which would compete with the former employer’s business. These types of restraint clauses can often also be referred to as non-disclosure, non-solicitation and non-compete clauses. Why are restraints controversial? Restraints, particularly broad constraints that limit an employee from pursuing employment with an employer in the same industry or field of work as their former employer, are generally considered controversial.
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Employees can be significantly disadvantaged by restraints as their freedom to participate in the workforce becomes restricted. Where employees are restrained by their former employer from working in the same industry or for a competitor’s business, the employee’s ability to utilise their experience and skills which they have worked to build, may become limited resulting in a reduced “future ability to work” in their chosen industry.1 This can also result in financial detriment to employees and lead to further broader economic issues. On the other hand, restraints provide favourable protection to employers, assisting them to protect their legitimate business interests such as protection against the misuse of their confidential information, maintenance of customer / client relationships and preservation of a skilled workforce.2 Without the enforcement of restraints, an employer’s competitiveness can be significantly impaired. Post-employment restraints can also be particularly beneficial for employers where there has been a breakdown of the relationship between the employee and employer which could lead to malicious and intentional acts by an employee to destroy the employer’s legitimate business interests. Are restraints enforceable? Not all post-employment restraints will be enforceable. The current common law doctrine of restraint (which is applied across Australia, other than NSW which has its own statutory restraints scheme)3 attempts to balance both an employer and employee’s differing interests.4 The starting position is that common law presumes that post-employment restraints will not be enforceable as they conflict with the general principles of public policy5 – that is, restraints limit freedom and may prevent an employee from earning a living. Therefore, restraints are deemed to be void and unenforceable unless it can be shown that in all the circumstances of the case, the restraint is reasonable by
reference to the interests of the parties concerned and reasonable by reference to the interests of the public.6 In determining the reasonableness of a restraint and whether competing interests are adequately balanced, the court will consider firstly, whether the employer has a legitimate business interest which needs protecting and secondly, if so, whether the restraint imposes no more than adequate protection to a party in whose favour it is imposed.7 If the restraint provides further protection than can be justified, it will be unenforceable. Legitimate business interests Reasonableness of post-employment restraints is determined by having regard to the legitimate business interests of the employer. If the restraint does more than protect the employer’s legitimate business interests, such as to stop employees from leaving the employer or completely preventing competition with the employer’s business, this may lead to a finding of unreasonableness. Categories of legitimate business interests continue to involve but may include: • protection of an employer’s relationship with customers / clients;8 • protection against any misuse of confidential information or trade secrets;9 and • protection of an employer’s trained and skilled workforce.10 Generally, restraints are more likely to be more reasonable when they apply to senior employees who have been able to develop significant client relationships and who had a greater access to trade secrets and confidential information. Reasonable duration In terms of duration, restraint clauses are generally drafted with a 12-month restraint period, although ladder / cascading clauses can also include greater and lesser time periods. In determining the reasonableness of the duration of restraints, courts have considered various approaches, however
