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The Value of Restraint of Trade Clauses

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Restrainted Love

Restraint of trade clauses are often used in employment contracts to prevent or limit an employee from engaging in conduct that is adverse or inconsistent with the employer’s interests once employment has ended. Typically, employees are restrained from soliciting clients or establishing competing businesses.

Restraint of trade clauses are often used in employment contracts to prevent or limit an employee from engaging in conduct that is adverse or inconsistent with the employer’s interests once employment has ended. Typically, employees are restrained from soliciting clients or establishing competing businesses.

In a previous Employment Law E-update, we outlined to employers the importance of restraint of trade clauses in employment contracts and how they can be enforced through the courts.

Two recent decisions highlight the value of post-employment restraint of trade clauses for employers.

 

Workpac Healthcare Pty Ltd v Branka Rovic, Supreme Nursing Pty Ltd, Principissa Bellatricus Pty Ltd and Elite Duce Pty Ltd [2017] QDC 22

In this case the employer was a labour hire and recruitment firm, primarily in the nursing and health care industry. The employer’s clients included Queensland Health and the Queensland Department of Justice. As a Business Development Manager, the employee was the primary point of contact for clients and had unrestricted access to the employer’s confidential information.

The employee resigned from her employment which took effect from October 2016. It was later discovered by the employer that the employee’s log-ins had been used to copy confidential information to a USB. The employee’s employment contract contained confidentiality provisions and non-solicitation clauses which restricted the employee from engaging in recruitment for third parties in the nursing or health sector for a six month period. Immediately following her resignation, the employee registered her own businesses and within days she had placed nursing labour hire candidates at a correctional centre.

The employer commenced proceedings in the Queensland District Court to seek an injunction against the employee from using its confidential information and from soliciting its clients and candidates. The employee argued that at the time of her resignation, the employer had agreed to remove her restraint provisions and would not enforce them. The Queensland District Court held that it was improbable that the employer had agreed to release the employee from her restraints, particularly as much of the employer’s income had come from placing candidates in corrective services.

The Court ordered the employee to be restrained from soliciting orders from the employer’s clients for labour management services, placing candidates and from soliciting the employer’s candidates. In granting the interlocutory injunction, it was noted that the employee could continue to work in other recruitment and labour hire roles – just not those related to the nursing or health care industry.

 

Devil Dog Pty Ltd v Cook [2017] WASC 27

The employee in this case entered into a Deed of Restraint with the employer which was associated with the purchase of the employee’s hydraulic servicing business “Matchtec Hydraulics” (Matchtec).

The relevant provision restrained the employee from engaging in certain activities, which included engaging in a similar business, soliciting employees and clients of the employer in Western Australia for a period of ten years.

Not long after his resignation, the employee commenced employment with another business which also serviced and repaired hydraulic cylinders. The employer sought an injunction after it received reports from customers that the employee made disparaging remarks about Matchtec and sought to solicit their business for his new employer.

The employee submitted that the industry was competitive and customers often shopped around when awarding jobs. The employee denied approaching former customers or making disparaging remarks about Matchtec, but rather customers had approached him to complain about the quality of work. The employee claimed that he did not look at the terms of the Deed or obtain legal advice as he had planned to return to the United Kingdom with his family. The employee also submitted that he was not qualified to work outside of the industry and could not obtain any income if he did not work.

Whilst noting that a ten year restraint period was “at the outer edge of what may be considered to be reasonable”, on balance, the Western Australian Supreme Court granted the injunction restraining the employee until the full matter was heard. The Court identified that the purchase price of the business included a large portion for goodwill, indicating customer loyalty. The Court was also not satisfied that the employee could not earn a living outside of the industry, noting that he had resigned before he joined the other business.

 

Lessons for employers

Both of these recent cases highlight that employers should be on the front foot with enforcing post-employment restraints. This could be as simple as reminding exiting employees by letter that they are subject to restraints and the details of those restraints. If a breach is suspected, employers should act quickly and request undertakings from the employee, seeking assistance of the courts to enforce the restraint if necessary.

 

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