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Employment Law News, July/August 2010
Employment Law News
Restraint of trade clauses have their limits for employers and employees, so use with care
Restraint of Trade Clauses: Information for Employers and Employees and Some Recent Examples
Restraint clauses are often inserted into employment contracts, with the intention of preventing an employee from working in competing business or taking clients or staff to a competing business or even sometimes seeking to prevent an employee from dealing with a particular after an employment contract has been terminated.
Over time, courts have considered the enforceability of such clauses which can effectively seek to stop employees from working.
Employees are commonly required by a clause in their employment contract to devote themselves exclusively to their employer, and to refrain from engaging in any other employment whilst that contract subsists. A similar protection may be afforded by the common law “duty of good faith and fidelity”. This duty requires that an employee refrain from engaging in any behaviour or action that is inconsistent with their employment contract with the relevant employer, or that is “repugnant” to that relationship. It may be noted, however, that it is far from certain that this duty will extend beyond ordinary hours of work, or after the termination of the employment relationship.
Duties Owed after the Employment Contract Ends
Confidential Information
An employee who sets up in business in competition with a former employer is entitled to use all general information acquired honestly and as a matter of course during the course of their former employment. Information that is confidential and that is retained by a former employee dishonestly, such as stolen customer lists, will give rise to a breach of the employee’s duty to their former employer.
Restraint of trade clauses
As a general proposition, the law regards all restraint of trade clauses as being void prima facie, since such clauses seek to restrict a former employee’s freedom to practice their trade. Such a clause will only be enforced by a court if it is shown to be reasonable for the protection of the legitimate interests of the employer, it does not unreasonably impinge upon the employee’s interests, and is not contrary to the public interest (Nordenfeldt v Maxim Nordenfeldt Guns and Ammunitions Co Ltd [1894]).
An employer’s interest will be a legitimate interest for the purposes of the law here where it is in the nature of a “trade secret” or a vital aspect of its goodwill. It will not be legitimate for an employer to seek to enforce a restraint of trade clause merely to prevent competition.
In considering the “reasonableness” of a restraint of trade clause courts will consider the geographical area in which it is said to have effect, the period of time over which it is expressed to endure, and the kinds of activities or businesses in which the clause seeks to prevent the former employee from working. A clause cannot be cast any wider than is absolutely necessary to protect the relevant legitimate interests of the employer. The more oppressive or far-reaching the clause, the less likely it is to be upheld by the Court.
It must also be shown that the clause was reasonable at the time it was drafted – that is, at the time the contract was entered into.
Where a restraint of trade clause is drafted so that its meaning or effect is not entirely clear, it will be struck out as invalid.
A Court may “read down” an unreasonable clause under the NSW Restraints of Trade Act 1976. This means some parts of the clause may be allowed and other parts will be struck out. See, for example, Woolworths Ltd v Olson [2004] in which an unreasonable restraint of trade clause was salvaged in this way by the Court. This case concerned the restraint of a former executive employee of Woolworths from using confidential information in a new position with Franklins. In a later case of Woolworths v Banks [2007], a restraint of trade clause sought to be enforced by Woolworths was struck out by the court. Here, unlike Olson, it was not clear that the employee’s subsequent employment was with a competitor of Woolworths, and did not involve the use of any confidential information.
Aussie Home Loans v X Inc Services[2005] concerned restraints contained in the contracts of employees of Aussie who subsequently left their employment to set up a rival brokerage. The clause essentially sought to restrain these former employees from soliciting any of Aussie’s customers or contractors, and was struck out on the basis that it was unreasonably broad in terms of its temporal and geographical reach, and because it sought to prevent the former employees soliciting clients and contractors of Aussie who had not been clients or contractors of Aussie at the time that the employees left their employment with them.
Reeves v Koops Martin Financial Services PtyLtd [2006] upheld the validity of a restraint clause levied against a financial planner. This clause prevented the former employee from accepting instructions from any clients of his former employer in Coffs Harbour and surrounds. The clause was expressed to last for 12 months, and this was held to be a reasonable period for the industry, since financial planning services are generally provided on an annual basis. A similar clause restraining a former managing director of Genesys Wealth from soliciting clients of his former employer was upheld in Miles v Genesys Wealth Advisers Limited [2009]. This was despite the relatively long duration of the clause (30 months) and the fact that the former employee was barred from soliciting clients that he had been servicing for more than 20 years, some of whom had been clients of his even before Genesys acquired the relevant business.
Forum Law can assist you with understanding and drafting employment contracts, and we can refer you to a specialist lawyer for more complex employment law matters.