A restraint of trade can be a useful and effective tool to protect your company’s confidential information and intellectual property including client lists. That said, a poorly drafted restraint clause will be unenforceable, so employers need to ensure their restraints are carefully drafted and tailored to each employee.
The emergence of new technologies means that confidential information and intellectual property is scattered across, and stored on, multiple devices and cloud-based software, making it harder than ever to protect. Accordingly, it is more important than ever to ensure your contractual restraint clauses provide sufficient protection and adequately complement any relevant workplace policies.
What is a post-employment restraint?
A post-employment restraint is a restrictive clause contained in an employment contract to protect the legitimate business interests of the employer after an employee leaves employment. Restraint of trade clauses are becoming increasingly common particularly for employees who hold senior and managerial positions within the company.
The most common types of restraint clauses include the following:
- A ‘non-compete’ clause which restricts the employee from working for a competitor both during and after employment within a specific geographical area and for a specified period of time;
- A ‘non-solicit’ clause which restricts the employee from contacting, approaching or accepting any approach from a client/customer of the business;
- A ‘non-solicit’ clause which restricts the employee from contacting, approaching or recruiting any employee or former employee of the business; and
- A confidentiality clause restricting the employee from using any confidential information belonging to the business.
Are restraints valid and enforceable?
Restraint of trade clauses are generally void as they are considered to be contrary to public policy. In order to enforce the restraint, an employer must prove to the Court that the employer has legitimate business interests to protect and that the restraint is reasonably necessary in order to protect those legitimate business interests.
Whether an employer has a legitimate business interest to protect depends upon the nature of the business and the industry within which it operates. In other words, legitimate business interests should always be considered on a case by case basis. Generally speaking, a legitimate business interest can include the employer’s trade secrets and confidential information. The Court will also consider the employee’s position and their relations with customers of the business. The closer the employee is to the employer’s customers, confidential information and/or intellectual property, the more reasonable the restraint is likely to be.
The restraint must also be reasonable in terms of scope and the activities it seeks to restrain. For example, it must be reasonable in terms of the period of time, geographical area and in terms of the activities it restrains and must be necessary to protect the good will of the company.
In most cases, whether the restraint is reasonable will also depend on the drafting of the clause. In most states and territories, the Court cannot change the wording of a restraint clause to salvage any component it considers reasonable meaning that if the clause is unreasonable, it will be struck out entirely. In NSW the Restraint of Trade Act 1976 (NSW) confers an express power on the Court to salvage any reasonable component of a clause and enforce the clause to that extent. That said, it is always important for restraint of trade clauses to be properly drafted to ensure they can later be enforced.
One way of achieving this is by using ‘cascading clauses’ in a contract which are essentially independent and separate paragraphs which can be struck out if they are unreasonable rendering the remaining alternatives to be enforceable.
For example, a contract can include sequentially reduced periods of restraint of 12 months or 6 months or 3 months and geographical restraints of Australia or New South Wales or Sydney. The court can then effectively pick and choose which it considers to be reasonable and strike out the rest. In Hanna v OAMPS Insurance Brokers Ltd [2010] NSWCA 267, the Court of Appeal held that cascading clauses were valid and enforceable where the clauses made it clear that each restraint was independent and separate.
How to enforce a restraint
In the unfortunate event that an employer is made aware of a breach, they can seek an injunction (through the courts) which restrains the employee from engaging in the restricted activity i.e. from contacting certain clients or performing work for a competitor. An account of profits can also be sought where the employee has made any profit as a result of their breach for example, from unlawfully using confidential information belonging to the company. Damages can also be recoverable for any loss that has been suffered by the employer as a result of a breach of any enforceable restraint clause in the contract.
In a recent decision of Grace Worldwide (Australia) Pty Limited (A.C.N 070 345 845) v Steve Alves [2017] NSWSC 1296, the Supreme Court of New South Wales enforced a restraint clause against a National Manager of a company prohibiting him from working for a competitor of the company, from soliciting business from the company’s customers, and from soliciting employees of the company. The restraint period in the contract of employment was 12 months, however the Court enforced a reduced restraint of 6 months noting that this was a suitable and reasonable protection period.
This case is significant because it highlights the Court’s willingness to enforce a restraint of trade clause to protect an employer’s customer connection especially in circumstances where the employee had significant client contact during his employment and his new employer was a direct competitor of the company.
Lessons for employers
We recommend:
- Care should be taken when drafting restraint of trade clauses to ensure that an employer’s legitimate business interests are protected;
- Businesses should review their employment contracts and avoid issuing ‘template’ contracts without consideration of the specific employee’s position – restraint clauses should be tailored to the employee’s individual circumstances;
- Ensure that employment contracts include a clause regarding protection of confidential information;
- If a senior level employee leaves the business, remind them in writing of their post-employment obligations; and
- Get workplace advice from legal experts prior to entering into any contract with restraint clauses to ensure clauses are reasonable and enforceable.