What to do when your employee leaves you for a competitor and you have a restraint of trade clause.
Your sales manager of 7 years has ended her employment with your business. Within days of leaving your business, you hear that she is working for your competitor. You look up her signed employment contract and see that there is a restraint clause. What next?
A restraint clause is not enforceable just because an employee has signed an employment contract agreeing to it.
At common law the starting point is that a restraint clause is void and unenforceable. This is because enforcement of these restrictions could prevent an ex-employee from obtaining other employment or restrict them from pursuing their profession or trade.
However, that doesn’t mean that all restraint clauses are unenforceable. A restraint clause will not be void if it is reasonably necessary for the protection of the legitimate interests of the employer.
The onus of enforcing a restraint of trade depends on the party seeking to enforce it. For example, if an ex-employer is seeking to enforce a restraint of trade clause on an ex-employee, some of the matters to be considered are as follows:
Once the contract of employment is terminated the ex-employer becomes aware that the ex-employee may be acting in breach of his or her post-employment restraint in his or her employment contract.
The ex-employer ought to contact the ex-employee, remind him or her of their post-employment obligations, asks for confirmation from the ex-employee that he or she will comply with their post-employment obligations and inform the ex-employee that legal proceedings that will be commenced if the ex-employee doesn’t comply.
If it becomes apparent that the ex-employee has no intention of complying, it would be up to the ex-employer to file a court application for an interlocutory injunction in an attempt to enforce the restraint immediately. It is important that such an application be made as soon as possible.
This is followed by an application filed in court by the ex-employer seeking remedies for a breach of contract.
The usual restrictions that employers may seek to impose are geographical (within a specific kilometre radius of the workplace), time limits, non-disclosure of confidential information and non-solicitation of the employer’s clients, contacts and employees.
It is important for employers to consider what interests they want to protect and for how long. A restraint clause that defines the legitimate business interests an employer is trying to protect will be easier to enforce.
When considering the inclusion of a restraint of trade clause in an employment contract, employers may wish to consider:
what interests they are legitimately protecting and if the restraint clause reflects this;
the seniority of the employee;
if the restraint will affect the employee’s ability to make a living in their profession or trade;
the reasonableness of the restraint clause and avoiding broad and onerous clauses;
not using the restraint clause as a way to stop competition;
any other areas that the business is likely to set up in the in the near future; and
including cascading clauses in relation to geographical and time limits so that any clause that is considered unreasonable can be severed without affecting the validity of the rest of the clauses.
If you would like the restraint clauses in your employment contracts assessed, our Employment, Industrial Relations and OH&S team can assist you.
For further information please contact:
Principal - Harwood Andrews
Paul is a Principal at Harwood Andrews. He brings a commercial approach to the law from a broad set of experiences as a business owner, private legal advisor and in-house counsel, and having worked with management teams over many years. Paul is valued for distilling issues down to what is really important and being prepared to make a risk call based on judgement and experience.
Paul’s key areas of practice include:
- commercial contracts and advice;
- business and share capital structuring;
- sale and purchase of business;
- procurement and service arrangements;
- technology, intellectual property, data protection and start-ups;
- consumer law;
- corporate advisory, including , company secretarial and directors' duties, shareholder relations; and
- capital raising and financing requirements
Paul also manages Harwood Andrews’ corporate counsel advisory service, built on a decade of experience as a client and managing legal functions within one of Australia’s biggest corporations.
Paul believes that evolving how legal services are delivered can be a win-win for lawyers and their clients, particularly how on how technology impacts the legal profession, legal advice and the delivery of efficient legal services.
Paul’s professional commitments include:
- Member of the Law Institute of Victoria
- Member of the Law Institute of Victoria’s Technology and the Law Committee