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Employment Law - Restraints Of Trade: Restraining Former Employees When The Work Agreement Has Ended

Date: August 14, 2009

Authors: Michael Pickering B.A., LL.B. (Hons.), LL.M., M. A.

Employment restraints are contractual terms which seek to limit the activities of the employee once their period of service ends. 

A post-employment covenant is one where there is an agreement about matters after employment has ended.

There are usually two areas where post-employment covenants operate. First, protecting confidential information; and secondly, precluding former employees from setting up a business or working in competition with their former employer.

Employers commonly require contractual undertakings from employees that they will not use any information acquired during their employment after termination.

The common law doctrine renders it illegal whereby any restraint of trade clause purports to restrain a person’s liberty to compete with a former employer.

This is counterbalanced by the exception that such a clause must be reasonably necessary to protect a legitimate interest of the employer. A restraint that goes no further than what is reasonable to protect the legitimate interests of the person taking the benefit of the covenant will be enforceable.   The principal element required for a post-employment restrictive covenant to be enforceable must be the identification by the employer of some legitimate interest which is protected by the clause. 

Commonly, this is often labelled the “customer connection”. The “customer connection” is the personal connection which an individual may develop with particular clients with whom they have associated in the course of their employment.

It can also extend to “no-poaching” clauses whereby an ex-employee does not take with them clients from their former employer. Whether such restraint clauses will be upheld will depend upon their reasonableness having regard to all of the circumstances including the nature and operation of the business.

An ex-employee cannot take with them information which ordinarily is the property of his or her ex-employer.  Clear examples are intellectual property owned by the employer or price lists of services and products. Names and addresses of clients is much less clear.

Restraint of trade clauses limiting employees working for other competing or rival employers are restraints on the liberty of a person to earn their living or exercise their trade where there are special circumstances to justify the restraint.   The onus rests upon the party alleging an unreasonable restraint of trade and it is a question of law for the court to determine whether the circumstances justify the restraint.

The position in Australia on restraint of trade clauses is that they are void for public policy reasons as being uncompetitive. However, this presumption can be displaced if the restraint can be demonstrated to be reasonably required to protect a legitimate interest. 

There are several considerations as to what constitutes a question of reasonableness. For instance:

  • For a restraint of trade clause to be upheld, there must be a legitimate interest which the employer seeks to protect;
  • Customers along with suppliers and employees make up the three relations upon which the profitability of a business depends. Thus, where the employee in question is the human face of a business, courts will find a short restraint period acceptable to allow the employer time to re-establish the customer relationship and to safeguard its investment;
  • Geographic limitations imposing a restraint clause which are unnecessarily expansive, whereby they seek to apply worldwide, will be held to be unreasonable. Depending upon the work-type or industry, even narrower geographic restraints may be void particularly with more junior employees;
  • Similarly, unlimited time clauses in restraint of trade clauses will be held to be unreasonable and will be struck down; and
  • Where some clauses seek to restrict and prevent an employee from joining direct competitors, they will have more of a chance of being upheld as opposed to restraint clauses which seek to prevent an employee from joining indirect competitors. Courts have held that the latter unreasonably seek to protect what is necessary to look after the employer’s business interests.

Australian courts will never re-write a restraint of trade clause. One way around the reading down of such a clause is to draft provisions which start off with a large ambit (in terms of restraint and location) whereby the restrictions which commence broadly cascade down to a much narrower restraint. 

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