Post-employment restraints are critical business tools for employers, according to Kathy Srdanovic, Counsel at Ashurst
Kathy Srdanovic, Counsel at Ashurst, explains why post-employment restraints are critical business tools for employers.
A well-drafted restraint can prevent a former employee from:
- using confidential information obtained during employment; and
- exploiting customer, supplier or staff relationships developed by the person during their employment.
Types of restraints
There are two main types of restraints:
A non-compete restraint restrains a former employee from working for a competitor or setting up a competing business.
A non-solicitation restraint restrains a former employee from soliciting or accepting work from customers of the employer. Non-solicitation restraints can also restrain the person from using suppliers of the employer or poaching the employer's remaining employees.
Elements of a defensible restraint
The most common error made with restraints is that they are not tailored to the individual and their circumstances. Template contracts are not just "fill in the blank" sheets. Whoever drafts a restraint should consult with the relevant part of the business to carefully identify the commercial interests being protected.
The key elements to increase the likelihood that a restraint will be enforceable are:
- a legitimate business interest capable of supporting a non-compete restraint
- the restrained business activity
- the geographical area; and
- the duration of time.
Legitimate business interest
As a matter of law, post-employment restraints are void for reasons of public policy and not enforceable. A restraint will only be enforced by a court where it goes no further than reasonably necessary to protect a legitimate business interest, such as:
- the protection of business connections; and
- the protection of confidential information.
A restraint that seeks to prevent an employee for working for any business in the same industry (regardless of the role they will be performing in the new company) would likely be too broad as it could prevent the employee from working in another area of a business where the client contacts or confidential information is irrelevant (for example, if they moved from an operational role in one company, to an HR role in another company).
As a general rule, restrained activities need to relate to the information or relationships being protected and should not go so far as to prohibit the employee from engaging in unrelated employment. For example, in Sportsbet v Carpanini  VSC 166, the Victorian Supreme Court considered whether a mid-level Customer Services Manager should be restrained from working in any capacity anywhere in Australia for any competitor for a period of six months. The Court found the restraint void and unenforceable due to the unreasonable breadth of the words "in any capacity".
A restraint should be limited to a geographical area no larger than necessary for the protection of the employer’s interest, i.e. the geographical area in which the business of the employer is conducted. For example, if an employer operates a business in NSW only, it is unlikely that a court will enforce a restraint expressed to apply beyond NSW. For example, in Bulk Frozen Foods Pty Ltd v Excell  TASSC 58 (3 November 2014), the Court upheld a restraint against a former manager of the Southern Tasmanian operations that prohibited him from working for a competitor across all of Tasmania. The area was found to be reasonable, as although the manager was based in one part of Tasmania, he was provided detailed confidential information about all of the Tasmanian branches. All of that information could be used to the advantage of a competitor and to the detriment of the plaintiff's business.
So, employers should identify the market in which their business operates, and consider whether the work the employee in question performs justifies a broad or a more defined scope.
Duration of restraint
The reasonableness of the duration of a restraint depends on factors such as the:
- employee's knowledge of the employer’s business
- nature of the employee's role; and
- extent of the employee's influence within the business.
To increase the enforceability of a restraint, employers should 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. This usually ranges from 1-12 months. A court will consider matters such as the length of time for which confidential information may remain current, or the time required for the employer to take measures to shore up its client relationships.
Applied correctly, these four elements will assist in providing a solid defensible post-employment restraint.
If you make a mistake in someone's employment contract are you bound to honour it?