29 February 2016

Beyond restraints: other methods of protecting business interests

Michael Starkey, Associate

When it comes to protecting legitimate business interests following a termination of employment, many employers will be familiar with contractual restraints of trade. Such provisions seek to prevent an employee from, for example, soliciting his or her former employer’s clients, or taking up employment with a competing business. Well drafted restraints can be invaluable in these regards – however, restraints are also notoriously difficult to enforce, and whether or not a restraint will be effective is often not known until it is too late.

In light of this, we thought we’d share some lessons from a recent decision of the New South Wales Supreme Court (BGC Partners (Australia) Pty Limited v Hickey [2016] NSWSC 90 (“Hickey”) which demonstrates that when it comes to protecting your business’ interests, restraints aren’t the only option.

Fixed-term contracts

It is a common misapprehension that a “fixed-term contract” is one that has a specified end date, but may be terminated by either party prior to that date. Such contracts are in fact “maximum-term contracts”. Fixed-term contracts are contracts that are unable to be terminated prior to their specified end date.

A business which is able to assess its needs in advance might consider employing executive employees on fixed-term contracts so it can be certain of the period that they will remain with the organisation (and, therefore, be kept out of the market).

Employers should be wary, however, of certain risks inherent in fixed-term contracts, including that a term of “reasonable notice” may be read into the contract in the event of a dispute, and of the organisation being “shackled” to an employee who might not perform as hoped.

Creative termination clauses

One way in which a fixed-term contract might be modified so as to mitigate some of these risks is through the inclusion of creative termination clauses.

In Hickey, the employee’s argument that he should be entitled to resign on the provision of reasonable notice was rejected because the express terms of the contract specified that he could only resign in very limited circumstances – that is, by giving notice within the final two weeks of the term, in which case the employment would end three months after the term expired.

Termination clauses such as this can help protect an employer’s business interests by:

  • preventing unilateral resignation in surprising circumstances; and
  • drawing out the length of any notice period, thereby giving the organisation time to secure its interests prior to the employee leaving it.

The outcome in Hickey was that the employee was prevented from working with his former employer’s competitor for nine months (being the three month “notice period” plus a six month restraint which was successfully enforced).

While restraints will remain the primary method by which most business’ protect their interests post-termination, by making themselves aware of other available options, employers can reinforce the protection of restraints as appropriate in the circumstances.

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