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Contractual Restraints: Protecting your business interests throughout the employment life cycle

2 November 2014


Contractual Restraints: Protecting your business interests throughout the employment life cycle

Alison Spivey, Senior Associate and Elizabeth Magill, Senior Associate

In a globally competitive economy it is essential that organisations are well-positioned to protect their business interests from the misuse of their confidential information and from the poaching of their clients, customers and staff. Well-drafted post-employment contractual restraints are an extremely useful tool to protect an organisation from the impact of former employees obtaining a commercial benefit from the organisation’s confidential information, from approaching or soliciting customers and clients of the organisation, or inducing other employees to leave the business. That being said, most of us only turn our minds to post-employment restraints at the point when an employee is looking to leave an organisation and the organisation wants to enforce the restraints, rather than considering these issues throughout the employment life cycle.

Most organisations don’t tend to think about the effect of post-employment restraints when recruiting prospective employees, and more specifically whether any contractual restraints applicable to these recruits will have an impact on the type of work they can perform when they commence employment with the organisation. Furthermore, where due attention has not be given to the scope and coverage of post-employment restraints at the time of drafting or revising a contract of employment, difficulties can subsequently arise when seeking to enforce ill-defined or ambiguous restraints that are not effectively drafted in line with the position the employee holds or business interests of the organisation.

In this article we consider the benefits to employers in proactively managing post-employment restraints throughout the course of the employment relationship, including during the recruitment process. We examine a recent dispute over restraints in the television industry to highlight potential pitfalls in this context, and provide guidance on how best to manage post-employment restraints to the advantage of your organisation’s business interests.

Getting it right from the start

Post-employment restraints are now a common feature of employment contracts and can operate as an effective mechanism to protect an organisation’s business interests. The types of business interests that may be the subject of protection through a post-employment restraint include the organisation’s confidential information, trade secrets, business know-how and goodwill. With respect to this latter category of business interests, goodwill captures those connections employees build with existing and potential customers and the connection they build with colleagues. An organisation should give careful consideration to the scope and content of the restraints in the contracts of employment it offers to its employees to ensure they capture the type of information, client contacts and business contacts it wishes to protect. Similarly, due regard should be directed to the appropriate geographic limitations and time-frame of such constraints.

Many employers are mindful of the restraints in the contracts of employment they offer to potential employees, but few organisations undertake due diligence around the post-employment restraints that may apply, to the employees they are seeking to recruit in connection with their previous employment. Failure to do so may expose an organisation to significant risks, particularly in relation to employees who held a senior or managerial role within their former organisation, or who held a sales role with a high level of customer and client contact, or had access to commercially sensitive trade secrets and confidential information.

For example, organisations may face a scenario where their new star recruit is required to “sit on the bench” for the duration of a post-employment restraint, rendering them unable to undertake their role until the expiry of the fixed period set out in the recruit’s contract with their previous employer. Alternatively, the organisation may find that their new recruit can’t expand the organisation’s business in the directions for which they were hired, because they are constrained in the areas they can operate or the type of clients and customers they can contact as a consequence of prior restraints. A worse case scenario is where an organisation finds itself having to defend a claim that they induced an employee to breach their post-employment restraint or that they gained, or will gain, a tangible benefit from the employee’s breach, as occurred in a recent dispute over restraints in the television industry.

The battle of the networks

This issue of inducing an employee to breach his or her post-employment restraint was considered in a recent case before the Supreme Court of New South Wales, Network Ten Pty Ltd v Seven Network (Operations) Ltd1 where Seven (notionally the “new employer”), was a defendant to the proceedings.

Mr Stephens (the second defendant to the proceedings), a television programming executive with over 40 years’ experience, was originally employed by Seven pursuant to a contract due to expire in 2015 and which provided that either party could terminate the agreement with three months’ notice. Mr Stephens commenced discussions with Ten and on 6 March 2014, Mr Stephens executed an employment contract with Ten and was due to commence employment on 9 June 2014, following the expiration of his notice period with Seven.

Mr Stephens subsequently received a counter-offer from Seven, which offered him a role with greater responsibility and a substantially higher remuneration package than his original package of that offered by Ten. On 10 March 2014, Mr Stephens withdrew his acceptance of Ten’s offer and accepted Seven’s offer to appoint him in the newly created role of Head of International Development. Ten did not accept this repudiation, opting to treat the contract as still on-foot and argued in Court that Mr Stephens was in breach of provisions contained in his employment contract which restrained him from “soliciting, encouraging or accepting any offers of employment from, or offers to provide services to any other entity without TEN’s prior written consent”.

This was expressed to apply “during the term of Mr Stephens’ employment”. Ten also argued that Seven knowingly and intentionally induced Mr Stephens to breach his contract of employment with Ten.

The Court found that Mr Stephens was not in breach of the restraints at the time he accepted employment with Seven since the restraints had not yet been enlivened (and would not be enlivened) until Mr Stephens’ employment with Ten “commenced” on 9 June 2014. The Court further stated that had it found Mr Stephens to be in breach of the restraint, it would have concluded that Seven intentionally and knowingly induced that breach by its offer of employment to Mr Stephens. The Court agreed with Ten’s argument that Seven was “on notice” that Mr Stephens had signed an employment contract with Ten and that the agreement with Ten provided for restraints that would prevent Mr Stephens working for Seven at the same time he was employed by Ten.

Tips on due diligence when recruiting:

  • Be aware that prospective employees that come on board may be subject to existing post- employment restraints.
  • Encourage prospective employees to seek a resolution of any post-employment restraint issues with their former employer before any offer of employment is made.
  • Assess the likely impact on the role and functions of the recruit arising from existing restraints.
  • Seek advice about the enforceability of any restraint terms that may apply to a prospective employee if the restraints are perceived as likely to have an adverse impact on your organisation’s operations.
  • Refrain from any conduct that may be interpreted as an inducement to breach any restraints.

Revisiting restraints for ongoing employees

A neglected area tends to be the situation of ongoing employees. For example, a long standing employee may have commenced in a junior role within the organisation, where the nature of that role did not warrant any, or any significant, restraints. However, over time that individual may have progressed through a number of roles, including to a more senior position in the organisation. In these circumstances the contractual restraints need to be reviewed and updated in order to protect the business interests of the organisation. Hence an organisation should regularly review and updated the post employment restraints in its employment contracts, with particular reference to the factors set out below.

Potential triggers for revisiting restraints:

  • changes in an individual’s role or function;
  • expansion of an organisation’s business into different sectors or locations;
  • enhanced range of clients and customers; or
  • development of new business knowledge, processes or confidential information

Being proactive in ensuring that any restraints are up to date can help to avoid the situation where a problem arises and an organisation is left exposed because the existing restraints no longer match its business interests, or the employee’s role.

Managing departures

Where an employee departs in circumstances where their subsequent employment is likely to be with a competitor, they are setting up business on their own account, or they are trying to take other employees with them, an employer may need to rely on a restraint clause to prevent damage to their business interests. Litigation to enforce a restraint clause will fail if the restraint clause is too wide or it goes further than protecting the organisation’s legitimate business interests. Recent case law confirms the principle that “in order to be considered reasonable, a restraint of trade must be reasonable by reference to the interests of the parties and the interests of the public.”2 Factors that a Court will take into account include:

  • the nature of the employer’s business;
  • the nature of the employee’s position;
  • whether the employee has had access to confidential information of the employer;
  • the relationship of the employee with clients and other employees of the business;
  • the duration of the employment;
  • the extent of the consideration provided by the employer for the restraint; and
  • the likely duration of the former employee’s personal relationship with customers of the employer.3

Hence it is important that the drafting of restraints is clear and unambiguous and reflects the organisation’s business interests, should subsequent enforcement proceedings eventuate.

“an organisation should regularly review and update the post employment restraints in its employment contracts”

Even where an employee leaves your organisation in circumstances where there is no suggestion that a breach of restraint will arise from any subsequent employment or business dealings, it is prudent for an organisation to draw to the departing employee’s attention the scope and nature of any existing restraints. An open discussion of the issue at this stage can prevent any subsequent misunderstanding arising, and also put the departing employee on notice that the organisation takes seriously the obligations that the restraints establish and will take steps to follow through on any conduct that may be prejudicial to its business interests.

Dealing with departing employees: 

  • Seek advice on the reasonableness of restraint where employee’s post employment plans are considered likely to give rise to potential breach.
  • Remind departing employees of ongoing obligations post-employment.
  • Confirm in writing the scope and nature of the obligations of the employee post-employment.
  • Make clear that conduct prejudicial to the organisation’s interests will not be tolerated.

Summary

Post-employment restraints are a matter of concern at every stage of the life cycle of an employment contract. While contractual restraints don’t often attract attention until something contentious arises, the preceding discussion highlights that a proactive approach to the management of restraints can reap benefit for an organisation in terms of risk minimisation. Recruitment and departures are key areas, as well as the currency of restraints for ongoing employees. The touchstone for assessing the appropriateness of the scope and nature of restraints should always be the capacity to protect the legitimate business interests of an organisation.

Key Takeaways

  1. Post-employment restraints are an effective way to protect the interests of your business.
  2. Proactive management of post- employment restraints is recommended throughout the employment relationship, not just when an employee is looking to leave the business.
  3. The effectiveness of your post- employment restraints will be enhanced by careful consideration of the scope and content of those restraints and tailoring the restraints to the needs of your business.

  1. [2014] NSWSC 692 (29 May 2014).
  2. ZEATM LTD -v- Zani [2014] WASC 25 (31 January 2014).
  3. See Sportsbet Pty Ltd v Carpanini & Anor [2014] VSC 166 (31 March 2014).
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