Post-employment restraints are common in employment contracts. Businesses impose these terms in contracts to protect their goodwill, client base, and staff because of the expenses incurred in building-up the business.
Post-employment restraints can restrain the employee from poaching staff, poaching clients, setting up a competing business and working for a competitor after the employment has ended.
Restraint of trade law is an area that has been heavily litigated by the Courts and this article aims to provide some guidance in relation to this complex area.
Enforceability of the Restraint
The law says that post-employment restraints are not enforceable unless they are reasonably necessary to protect the ‘legitimate interests’ of the business. It is this definition that has caused lots of disputes between employers and employees.
What exactly does it mean to protect a ‘legitimate interest’ and what is reasonable?
There are many questions that need to be answered in determining this.
The first is, how senior was the employee who is bound by the post-employment restraints? The more senior the employee and the more access they have to for example, confidential information, the wider and longer the terms of the restraint which would be reasonable. Conversely, the less senior the employee, the narrower the restraints that will be deemed reasonable by the Court.
What is reasonable would depend on the personal circumstances of the employee.
It is not possible for us to give examples of every scenario. However, below are a few examples of cases that we have seen which involve post-employment restraints being found to be unenforceable.
If the employer wishes to enforce a term preventing the employee from setting up a competing business or working for a competitor after the employment has ended, the employer needs to ensure that the restraint of trade terms in the employment contract specifies:
- the geographical area that the employee is prevented from working in; and
- for how long the employee is prevented from doing the restrained activity after the employment is ended.
We have seen contracts which state that the employee is prevented from working for a competitor for a period of two years after the employment ends. In that case, the post-employment restraint will not be enforceable because it is clearly unreasonable. Firstly, a two-year period is excessive and secondly, such a term does not specify the geographical area the employee is restrained from working within.
Does that term prevent the employee from working for a competitor all around Australia or only in the State that the employee works in? It doesn’t specify so that’s why that term would most likely not be enforced against the employee.
The Court is very mindful that it is in the public interest for there to be free trade which encourages a productive economy. The Court is always balancing this with the desire of businesses to protect their key assets and goodwill.
A post-employment restraint for a short period of time preventing the employee from poaching staff and poaching clients could be enforceable if it is necessary to protect the employer’s business interests. For example, a restraint for a period of say three months after the employment ends preventing the employee from doing these things could be seen as reasonable and enforceable, however it still depends on the individual’s personal circumstances.
Any restraints which seeks to protect trade secrets and confidential information is likely to be seen by the Court as reasonable and enforceable.
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