Employees can be a great asset to a business, particularly if they have significant corporate knowledge and good relationships with clients. A real concern for business owners can be how to protect the business against an employee leaving and starting up a rival business, or joining a competitor and potentially taking clients, other employees or intellectual property with them.

How can I protect my business?

The only way employers can protect themselves against this risk is by having a detailed and tailored employment contract. This contract must include a clause governing an employee’s conduct both during the employment relationship and for a reasonable period after it ends (often referred to as the ‘restraint period’). This period is typically between three and 12 months. This type of clause is usually called a ‘restraint of trade’ or ‘non-competition clause’ and can include:

  • Non-competition: preventing an employee from starting a new business or being involved with a business in direct competition with the previous employer
  • Non-solicitation: prohibiting an employee from actively trying to take clients with them when they leave, or otherwise interfering with an employer’s relationship with their clients
  • Non-recruitment: prohibiting an employee from actively trying to take other employees or contractors with them when they leave, or otherwise interfering with an employer’s relationship with their workforce.

In addition to these restraints, an employee contract should also include detailed clauses protecting the employer’s confidential information and intellectual property, and governing how an employee can and cannot use that information.

Are restraint clauses enforceable?

The answer is yes, within reason.

Historically, courts have been reluctant to enforce restraint clauses on the basis that employees are entitled to use the skills, experience and know-how acquired during the previous employment in legitimate competition in future employment. A clause that interferes with this entitlement is likely to be held as ‘contrary to public policy’ and therefore void, or invalid. In general, all restraint of trade clauses are considered void unless proven otherwise.

In recent years, however, employers have been successful in seeking injunctions, and even damages. This is in cases where it has been established that the clause in question is reasonable in all circumstances and has been designed to protect a legitimate business interest. ‘A legitimate business interest’ is a specific interest of the business, such as its confidential information or relationships with key clients and staff, which it seeks to protect through the restraint.

The ability to enforce a restraint clause depends on how carefully the clause is drafted and tailored to the employer’s business activities and interests that they want to protect. The clause must not impose more than what is necessary to protect the business interests of the employer and if it goes beyond this then it will be considered unreasonable.

The clause should specifically outline the employer’s business interests, as the broader it is the less likely the Court will enforce it. ‘Cascade’ clauses can be used, that involve several ‘cascading’ options for the court to enforce. They set out progressively narrower restraint areas (physical distance from previous employment) and shorter restraint periods (time since employee left). This allows the Court to create a narrower or shorter valid restraint if needed, within the parameters of the clause contained in the employment contract.

Whether the scope of the restraint is considered reasonable will depend on the business of the employer and the position and expertise of the employee. Some examples of where restraints have been held to be reasonable include:

  • In HRX Holdings Pty Ltd v Pearson, the Court upheld a two-year restraint prohibiting a former director and co-founder of the employer from accepting a position with a competitor, on the basis that he was the ‘human face’ of the business in its dealing with customers and integral in pursuing new business.
  • In Agha v Devine Real Estate Concord Pty Ltd, the Court upheld a three-year restraint prohibiting a former director and shareholder of the employer from being involved with a business in direct competition with the employer and from disclosing confidential information. It was determined that the employee’s maliciousness, blatancy and extensiveness of the breach demonstrated that he should be restrained for three years in both the maximum six kilometre radius area of the Employment Agreement and all post code areas of the Shareholders Agreement. This conclusion was helped by the seniority of the employee as both a past shareholder and employee of the Devine Group.
  • In Southern Cross Computer Systems Pty Ltd v Palmer (No 2), the Court prevented an IT specialist from working for a competitor after it upheld a four-year restraint period. Importantly, the clause that was relied on was not contained in an employment agreement, but in an agreement to sell his 40 per cent shareholding in the company. The finding considered a range of factors, including the length of his employment, his role as a ‘Key Employee’ and the large amount paid for the shares.

How can we help?

Should you have any questions regarding restraint of trade clauses as an employer or an employee, please do not hesitate to contact our Employment Law team on 02 6285 8000 or by email.