Employment Restraints

Restraint of trade clauses prevent employees from starting a business, working for a competitor, doing business with a client or customer, hiring current or former employees and a range of other things. These restraint clauses are not enforceable unless they comply with strict legal criteria. We can help explain whether your restraint of trade clause is enforceable and the risks they carry.

When employees change jobs or set up a new business on their own, it is often seen as an advantage to the bring an existing network of customers or industry knowledge to their new position. Although this is seen as common practice, many employees may not be aware that doing so runs a risk of breaching a post-employment restraint.

What Is A Post-Employment Restraint?

A post-employment restraint appears in an employment contract or a separate agreement. The restraint is designed to prevent the employee from engaging in a range of behaviours after the employment has ended, such as working for a competitor and dealing with clients and employees.

In the past, any clause or term in a contract restraining trade was considered to be "void" and not enforceable against the employee. However, in more recent years employers have been able to use post-employment restraints where they can show some "legitimate interest" is being protected.

A legitimate interest can come in two forms:

  1. The first type of interest is the protection of confidential information. Confidential information refers to more than just skills and industry knowledge or 'knowhow'. It is information that is special or unique to the business in the form of trade secrets. This category can also include goodwill of the employer.
  1. The second type of interest is preventing competition. Essentially, this legitimate interest is about the employee not being able to interfere with the client base or workforce of the previous employer. This can mean soliciting, enticing or interfering with any "repeat or long-term" client, or poaching certain employees for a defined period after the termination of employment.
When Do Restraints Apply?
When Do Restraints Apply?

Not all post-employment restraints can be enforced against the employee. The Courts will have to determine whether the contractual links to protect legitimate interests are reasonable. For example, purely not competing with the business by working for a rival company is not recognised as reasonable. Some factors that the Court will consider to assess reasonable restraint include duration of the restraint (length of time), the geographical area the restraint applies over, and the activities to control (i.e., information and client base).

A recent case where the Court considered reasonableness is Skill Search Contracting Proprietary Limited vs Jeffrey Drewery. This case involved an action against a former company executive where he was prevented from undertaking unpaid 'backend' administration for a recruitment business. The recruitment business was run by a former colleague and friend of the company that the executive worked for. The Court determined that the scope of the non-compete restraint in his contract that prohibited him from directly or indirectly engaging in any business which competed with Skill Search reasonably included this type of recruitment business.

The lesson to be learned here is that executives, due to their responsibility in a company, are likely to face tougher restrictions on their trade and can be found to compete with their former employers in indirect ways.

Award Compliance

It's also important that an employment contract complies with any modern award that covers employees of the business.

Many awards have an express obligation that an employer must notify the employee in writing of their classification level, working hours, pay rate etc.

We often see employment contracts which don't take into account the award terms. If this occurs, then the business can be in breach of the award and can be subject to penalties.

Award Compliance
How Can You Make A Claim?

To make a claim a claim against an employer, you will need to demonstrate that the following has occurred:

  1. The employer was protecting a legitimate interest (Such as confidential information, goodwill, a stable workforce, customer connection, commercial interests)
  1. The restraint was more than was reasonably necessary to protect the employer's interest and the public's interest
  1. The contractual restraint has been breached in some way.