Jurisdiction - Australia
News
Australia – “If I Can’t Have You…” The Enforceability Of Post-Employment Restraints.

27 May, 2014

 


What You Need To Know

 

  • In a series of recent cases across Australia, courts have again considered the enforceability of post-employment restraints. 
  • In an economic climate where executive mobility levels are high, post-employment restraints can be a critical tool to protect confidential information, client contacts, know-how and competitive advantage. 
  • Courts will only enforce a reasonable restraint clause. What is reasonable depends very much on the circumstances. 
  • Recent decisions are a timely reminder to employers about the limitations of a restraint clause. An employer must be proactive before, during and after the employment relationship to increase the likelihood of an employee complying with a restraint and/or a court enforcing it.

 
What You Need To Do

 

  • Be strategic in the way that you use restraints, both in when you use them and in how you draft them.
  • In some cases a template clause may be sufficient to set expectations. For more certainty about enforceability, you will have to tailor a restraint clause to the person and his or her circumstances. 
  • For each applicable employee, identify the legitimate business interest that the restraint seeks to protect. Then draft a restraint that goes no further than is reasonably necessary to protect that interest. 
  • Act quickly if an employee is in breach. Restraints operate on a “use it or lose it” basis, so an employer can lose the benefit of even a valid restraint clause if it waits too long before acting on it. Courts will not issue an injunction enforcing a restraint where the employer has delayed unduly in making its application. 

 
After The Break-Up

 
You hire a talented and experienced senior executive who takes your business forward in leaps and bounds.

 
All is well until, suddenly, they resign to join a competitor.

 
What can you do to protect your business?

 
In this uncertain economic climate, executives are on the move. Whilst circumstances will always be slightly different, the scenario above is not uncommon.

 
When a valuable executive leaves to take up new employment with a direct competitor, your immediate concern will usually be to protect your business by stopping them from taking important client accounts or misusing confidential information.

 
Early 2014 has seen a series of cases in which employers have sought to enforce post-employment restraints. These decisions come from multiple Australian jurisdictions and provide a timely reminder for employers to carefully consider this issue before, during, and after employing a senior executive.

 

Why Do Post-Employment Restraints Fail?

 
An employer will always face an uphill battle to enforce a restraint clause, because the starting point is that a restraint which prevents a former employee from competing with a former employer will be invalid because it is contrary to public policy. A restraint clause may be enforceable if:

 

  • the employer has a legitimate business interest to protect; and 
  • the restraint goes no further than is reasonably necessary to protect the legitimate interest.

 
Ultimately, the decision whether or not to enforce a restraint is a matter of discretion for a court. Some reasons why a court may not exercise its discretion to enforce a restraint include: 


The Restraint Period Is Too Long Or The Scope Too Broad

 
Courts will not enforce a restraint clause which places excessive limitations on the former employee beyond those necessary to protect the employer.

 
In Sportsbet v Carpanini [2014] VSC 166, the Victorian Supreme Court refused to enforce a clause preventing a mid-level Customer Services Manager from working or interacting, in any capacity, anywhere in Australia, with any competitor of her former employer, for six months. The court noted that the phrase “in any capacity” has previously been found to “destroy a restraint covenant as being unreasonable” .

 
By contrast, in Fairfax Media Management Pty Limited v Harrison [2014] NSWSC 470 the judge indicated that a six month restraint against a senior executive who left to become CEO at a competitor was likely to be reasonable. The NSW Supreme Court took into account:

 

  • the employee’s seniority
  • that it would take some time to find someone to replace him 
  • the information (including strategic planning) to which he would have had access; and 
  • the contacts he would have developed with clients.

 
In two other cases where employers later sought damages for breaches of a restraint period, courts in South Australia and NSW also accepted that six month restraints were reasonable in the circumstances. In RNTT Pty Ltd v Constable [2014] SADC 78, the court was particularly influenced by the fact that the employee had been with the company for 17 years and was the principal point of contact with clients. In Andrews Advertising Pty Ltd v David Andrews [2014] NSWSC 318, it was relevant that the person restrained had been the central point of contact with the company’s major client.

 
The Interest Or Information Protected By The Restraint Is Not Identified

 
A post-employment restraint must protect a legitimate business interest of the employer. This means being able to explain why, and showing how, the person’s new job puts your business at risk.

 
Another reason the employer was unsuccessful in Fairfax was that it failed to lead evidence of confidential information that the former employee actually knew and that was likely to be immediately useful to the new employer.

 
The Interest Or Information Protected By The Restraint Is Not Under Threat

 
In Sportsbet, the employer was able to point to specific information to which the former employee had access. But this was not enough. The mere fact that a person has access to confidential information is not, in and of itself, sufficient to justify restraining them. Similarly, in Fairfax, the judge doubted that there was actually a risk that the employee would make use of customer connections during the restraint period to the detriment of his former employer. 

 
There Are Other Ways To Protect The Business And Information

 
A restraint clause is less likely to be enforced if there is another way to protect your business.

 
For example, in Fairfax, the new employer allowed the employee to give undertakings that he would not make use of customer connections he had developed to the detriment of the former employer during the restraint period.

 
The Employer Is Too Slow To Act

 
If an employer does not act quickly to enforce a restraint, it will likely lose its chance to enforce even an otherwise valid restraint clause. In Fairfax, the former employer took three weeks to reply to a letter from the employee’s new employer, and a further week to initiate court action. The Supreme Court found that four weeks was too long a delay, especially where the restraint was only to last for another seven weeks after that.

 

Increasing The Likelihood Of Enforcing A Restraint

 
Enforceability always depends on the circumstances. Factors that may increase the chances of a court enforcing a restraint include:

 

Identify The Legitimate Business Interest To Be Protected

 
In addition, identify why the departing employee poses a risk to that interest.

 
Tailor The Restraint To The Employee

 
A standard form clause may be sufficient. For more certainty about enforceability, carefully draft to the particular employee’s situation, knowledge, contacts and the risk that their employment elsewhere creates. Consider:

 

What Is The Employee’s Position?

 
The more senior the employee, the more likely he or she will have access to confidential, strategic information or commercial contacts you want to protect. In Sportsbet, the court was not satisfied that a Customer Services Manager was sufficiently senior to warrant her restraint.

 
What Is The Specific Information, Contacts Or Know-How That You Want To Protect?

 
The fact that the person will have access to confidential information is not of itself sufficient to justify restraining a person.

 
What Behaviours Does The Restraint Prevent?

 
It will be much harder to enforce a non-competition restraint than a non-solicitation restraint, especially where the clause prohibits any employment in the industry. 

 
What Is The Geographical Scope Of The Restraint?

 
Try to reflect the areas in which the employee operated, or had trade connections.

 
For How Long After The Employment Ends Will The Person Need To Be Restrained?

 
Consider a period that reflects the needs of the business: for example, the contractual cycle in which the business operates, or the time it will take a replacement employee to build up customer connections.

 
“Reasonableness” Is Assessed At The Time Of Entering The Contract

 
Consider if a restraint clause needs to be reviewed when a person is promoted and enters into a new contract.

 
Seek Advice On Drafting Technicalities

 
NSW is the only Australian jurisdiction where a restraint clause can be “read down” if it is too broad. In other states, clauses need to be drafted as a series of alternatives.

 
Consider Including Provision For Payment During The Restraint Period

 
This provides evidence of a fair bargain between the parties.

 
Ensure That The Employee Has An Opportunity To Obtain Legal Advice Before Signing A Contract.

 
Considerations At Each Stage

 

Before employment

 

During employment After employment
  • Identify positions that may pose a risk if the incumbent moves to a competitor
  • Identify the legitimate business interest to be protected
  • Tailor a restraint clause to the person and his or her situation
    • Activities
    • Time
    • Geography
 

  • When a person is promoted, consider whether to issue a new contract with a revised restraint clause
  • Avoid representations that the restraint may not be relied upon
 

  • If a former employee leaves to join a competitor, check the terms of any restraint clause in his or her contract
  • Write to both the employee and the new employer seeking undertakings that the person will comply with the restraint
  • In the absence of adequate undertakings, act quickly if you want a court to enforce the restraint

 

Making The Case: Insights from Geoff Giudice

 
Fairfax v Harrison involved an application for an injunction to restrain a former employee from taking up employment with a competitor for the remainder of a six month restraint period, which was approximately seven weeks. The court found there was an arguable case the restraint was valid but refused to grant an injunction because:

 

  • there was little risk the employee would be able to make use of his customer connections to the former employer’s detriment during the seven weeks 
  • there was no risk of the employee using the former employer’s confidential information during that period; and 
  • the former employer had delayed four weeks in initiating proceedings after becoming aware the employee was likely to commence with the new employer.

 
The court put a great deal of weight on the fact that the employee gave undertakings that he would not make use of his customer connections or any confidential information during the seven weeks. In restraint cases the courts are generally more concerned with the protection of the employer’s commercial interests rather than restraining employment with a competitor as such. Offering to give undertakings can be an effective defence for a former employee. Even so, giving undertakings to a court is a serious matter and their scope should be carefully considered.

 

Ashurst Logo

 

For further information, please contact:

 

Marie-Claire Foley, Partner, Ashurst
marie-claire.foley@ashurst.com 


Geoffrey Giudice, Ashurst
geoffrey.giudice@ashurst.com


Julie Mills, Ashurst
julie.mills@ashurst.com 


Hannah Martin, Ashurst
hannah.martin@ashurst.com

 

Ashurst Labour & Employment Practice Profile in Australia

 

Homegrown Labour & Employment Law Firms in Australia

 

Comments are closed.