Part One: In a mobile employment market – what about restraints and repudiation?

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By Laura Sowden, Partner and Theresa Au, Law Graduate

Post-employment restraints

Post-employment restraints are more relevant than ever given the current state of the labour market. Skills and labour shortages due to the ongoing pandemic mean skilled workers have more opportunities to move between workplaces, particularly as high-skilled roles are experiencing strong labour demand.

What is a restraint of trade?

Restraints of trade clauses, or post-employment restraints, can play a crucial role in protecting the legitimate interests of the employers when employees resign.

They are written terms included in employment contracts to protect an employer’s trade secrets, confidential information, customer connections and staff connections by restricting an employee’s activities after they have left employment.

Some examples of the activities a restraint might try to stop include:

  • Contacting the employer’s clients for the purposes of selling goods or services or enticing the clients away from the employer;
  • Setting up a business competing with the employer’s business or working in a competitive business; and
  • Poaching employees of the business.

It is particularly common for employment contracts of mid to senior level managers and executive employees to include restraint clauses, or for employees in particular roles such as client/customer facing sales roles.

The restrictions contained in a restraint of trade clause are usually framed by reference to:

  • a geographical area;
  • a period of time;
  • defined industries, businesses or activities that the employee cannot be involved in; and/or
  • classes of people (such as customers, clients or employees) with whom the employee is restricted from dealing.

Enforceability

Employees need to earn an income, and to use their skills and industry knowledge for their own benefit.

On the other hand, businesses also want to protect their proprietary interests and goodwill. Contract terms restricting a person’s liberty to carry on a business or enabling a company to gain a monopoly on trade are contrary to public policy and are void subject to some exceptions.

In order for a restraint to be enforceable, an employer must demonstrate that at the time the restraint was agreed:

  • there was a legitimate interest of the employer to protect; and
  • the restraint imposed was no more than reasonably necessary to protect the interest.

What is reasonably necessary will be determined based on the particular factual circumstances including the length and geographical area of the restraint, the nature of the activities restrained, the seniority of the employee.

Other factors can be considered such as the trends of the labour market, the time it takes to replace the employee or take over client relationships in addition to how the contract of employment was terminated.

Enforcement

Employers may seek to enforce restraints if they suspect an employee is breaching their post-employment obligations by:

  1. writing to the ex-employee demanding they cease and desist from any and all activity and requiring them to provide written undertakings to confirm the former employee’s ongoing compliance; and then if the conduct does not stop
  2. seeking an interlocutory injunction to stop the ex-employee from breaching the restraints of trade.

However, a post-employment clause is likely unenforceable if the employment contract ended because of the employer’s breach or repudiation.

Another course of action is to later seek damages arising out of a breach of a restraint of trade.

For further information, please do not hesitate to contact us.

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    Workplace Relations, Employment & Safety

    Protecting Your Employees: Maintaining Confidentiality