In the lead up to our webinar titled “Hold the Line! – Restraints & Employment Contracts” on 28 August 2019, we wanted to share some of the main discussion points and prominent cases on the topic of restraints of trade.

Drafting Restraint of Trade Clauses

Employment restraints often seek to restrain a departing employee for a specific amount of time from soliciting work from the employer’s clients and customers, poaching other employees and/or from working for a competitor. Such restraints are particularly important when there is a concern that the employee has confidential information or relationships that, if exploited and not restrained, could cause detriment to the employer’s business.

Restraint of trade is a unique area of the law because it operates on the fundamental premise that restraints of trade are anti-competitive and prima facie unenforceable. An employer must therefore prove that a restraint is reasonably necessary to protect its legitimate business interests if it seeks to enforce one on a departing employee.

One of the key problems in enforcing restraints is often that the relevant clauses in a departing employee’s employment contract are not as tailored as they need to be in order to be enforced. For example, it is unlikely that a court will accept that it is reasonably necessary to restrain an employee from working for a competitor for five years anywhere in the world if that employee was a part-time administration officer.

This is a problem that can easily be avoided by strategic planning and drafting of restraint clauses at the very beginning of the employment relationship. Restraints should be drafted with the specific position and duties of an employee in mind and with consideration as to what would be reasonably necessary to protect the employer’s legitimate business interests.

Restraints of trade are dealt with at a state and territory level and so care must be taken to ensure that they are drafted to be enforceable within the relevant state or territory jurisdiction in which the employee is employed.

For example, the common law (which applies to restraints in all states and territories except New South Wales) prevents a court from adding words or modifying a restraint to make it reasonable. Accordingly, if a court finds a restraint unreasonable at common law – it is entirely void.

For this reason, many restraints often include ‘cascading’ clauses which enable a restraint to be read down if required.

Case Law Considerations

However, the drafting of the restraint is not the final consideration for the courts. A range of other factors will also be considered in determining whether a restraint is enforceable or not. Three recent cases that have highlighted these other considerations, including the need for there to be a real risk to the employer’s business and whether information taken by and employee is actually confidential.

In Austal Ships v Clay [2018] WASC 178, the Supreme Court of Western Australia granted an interlocutory injunction in favour of an employer which prevented a former assistant projects manager from joining a competitor while the Court determined whether the restraint was reasonable or not. In ordering the injunction, the Court noted that the new employer was a direct competitor to whom the previous employer had just lost a tender, and that the employee had current knowledge of his previous employer’s confidential operations as well as confidential information about current tenders. There was, therefore, a real risk that the employee could reveal confidential information and cause damage to the employer’s interests.

In contrast, the Supreme Court of New South Wales in SAI Global Property Division Pty Ltd v Jones [2018] NSWSC 438, refused to grant an interlocutory injunction against a former head of segment and strategic sales because there was no evidence that the employee had taken any confidential information upon his departure, and the Court was satisfied that the employee was not joining a competitor directly, rather a subsidiary, and that did not justify the enforcement of the restraint.

Finally, in Dargan Financial Pty Ltd ATF the Dargan Financial Discretionary Trust (trading under “Home Loan Experts”) v Nassif Isaac [2017] NSWSC 1077, the Supreme Court of New South Wales considered whether an employee had breached his post-employment obligations to his former employer when he took client information to his new employer. The employee tried to argue that the client information was readily available on Facebook and was therefore not confidential information belonging to the employer. The Court rejected this argument and found that the client information contained more detail than merely the contact information of the individuals and included financial information. The Court made orders for both injunctive relief in favour of the former employer as well as an order for damages.

Are you prepared?

In our daily work with clients we have seen an increased awareness from employers on the post-employment activities of employees as well as a desire from employers to review the strategies they use to minimise the risk of confidential information being misused by their current and former employees. With both employers and employees having an increased dependency on digital information and electronic storage systems, such as cloud storage, we encourage employers to review their current restraint clauses and confidential information policies and procedures.

We continue to remind employers that, where there is a concern about an employee breaching a restraint or otherwise breaching their duties to their employer, it is imperative that swift action be taken to minimise any damage.

To learn more about restraint of trade clauses and how best to protect your business please register to attend our upcoming webinar, “Hold the Line!”.

Information provided in this blog is not legal advice and should not be relied upon as such. Workplace Law does not accept liability for any loss or damage arising from reliance on the content of this blog, or from links on this website to any external website. Where applicable, liability is limited by a scheme approved under Professional Standards Legislation.