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Post-Employment Restraints: What is Reasonable?
In a recent case the NSW Court of Appeal (the “Court of Appeal”), considered the issue of whether the post-employment restraints of a senior manager and his more junior employee were reasonable. The post-employment restraints prevented the employees from joining a competitor.
The case was an appeal from the NSW Supreme Court which found that the post-employment restraints enforced by the employer, Employsure, upon the senior manager and junior employee, were reasonable and should apply for nine months.
You can read about the key principles of post-employment restraints in our article here.
The principle of “reasonableness” relates to whether the terms of the restraint are reasonable to protect the legitimate business interests of an organisation. This case explored the application of this principle in respect of two employees with disparate levels of seniority.
The Court of Appeal noted that the need for post-employment restraints arises because of the difficulty of restricting employees from utilising information, which may be confidential, but is nevertheless stored in their minds from their experience of working with their employer. Therefore, confidentiality obligations will not sufficiently protect an organisation from such information being used by a competitor employing their former employee, and the only protection is to prevent former employees from commencing employment with a competitor for a certain period of time.
The senior manager’s restraint
The senior manager’s employment contract included confidentiality obligations and a cascading post-employment restraint that he would not be engaged in a business in competition with Employsure for a period of 12, 9, 6, or 3 months. In the initial decision the NSW Supreme Court found that the restraint could be enforced for a period of nine months following the termination of the senior manager’s employment.
In considering whether the senior manager’s nine-month post-employment restraint was reasonable, the Court of Appeal considered the following issues:
- whether the organisation had a legitimate protectable interest; and
- whether the restraint was no more than reasonable for the legitimate protection of that interest.
The Court of Appeal found that the senior manager:
- held a senior role as Outbound Sales Manager which led him to become privy to Employsure’s strategic vision;
- had attended senior management team meetings and received materials that were highly confidential in relation to all aspects of Employsure’s business;
- must have gained intimate knowledge of Employsure’s strategic strengths and weaknesses; and
- was exposed to confidential information that could be used to the detriment of Employsure. This was particularly relevant given the senior manager’s new employer, ELMO, was a competitor of Employsure.
The Court of Appeal found that ELMO was a competitor of Employsure at the time the employment was terminated and Employsure had a legitimate protectable interest. The nine-month post-employment restraint of the senior manager was no more than reasonably necessary and was upheld.
The junior employee’s post-employment restraint
The Court of Appeal also considered whether the junior employee’s nine-month post-employment restraint was reasonable and valid.
The Court of Appeal addressed the same issues as above in relation to the senior manager’s post-employment restraint. However, it found that the junior employee’s lack of seniority within Employsure was relevant in assessing the reasonableness of the restraint, particularly the duration.
The Court of Appeal found that the junior employee’s memory of confidential information would likely be short-lived, considering his low-level position. Accordingly, the Court of Appeal found that the post-employment restraint of the junior employee was not reasonable.
Because the restraint was drafted as a cascading restraint (meaning the duration of the restraint was not set, but rather, could be enforced for a period of 12, 9, 6 or 3 months), the Court of Appeal could have considered whether a shorter post-employment restraint was reasonable. However, this was not explored as Employsure did not press for this during the hearing.
Post-employment restraints of trade are important contractual tools to protect the legitimate business interests of organisations. As the above case demonstrates, a “one size fits all” approach cannot be adopted and restraints need to be drafted carefully based on the specific requirements of an organisation and the individual circumstances of an employee, including their seniority.
Restraints must be drafted with enforceability in mind and should be reviewed regularly, particularly where an employee is promoted or there are other contractual variations.
Kirryn West James, Director
Other Relevant Resources
2 November 2014