Think Before You Act: Enforcing Restraints Strategically

 
Michael Starkey, Associate

It is a common misapprehension, particularly among employees, that post-employment restraints are rarely enforceable. In fact, provided they go no further than is reasonable and necessary to protect an employer’s “legitimate business interests”, courts are willing to uphold such restraints, which can prevent former employees from taking up work with a competitor, or soliciting or accepting work from the employer’s clients. However, post-employment restraints remain tricky for reasons broadly associated with two “stages”.

  1. Documentation and drafting: post-employment restraints must be properly documented and drafted so that they only impose obligations which are reasonable and necessary; and
  2. Circumstances of enforcement: when an employee’s employment comes to an end, a business needs to make a decision about whether or not it is worthwhile to seek to enforce the restraint.

This article looks at a number of considerations employers may wish to take into account when making decisions associated with these “stages”, in order to ensure that their use of post-employment restraints is practical, strategic and helps to protect their business interests.

Up-to-date Documentation

The surest way of protecting an employer’s legitimate business interests is including a properly drafted post-employment restraint in an up-to-date contract of employment that is applicable to an employee’s current position. While all employees have ongoing obligations in respect of an employer’s confidential information, attempting to enforce restraint obligations which are not documented, or which are only documented in an employment contract that is no longer relevant to the employee’s role, is a difficult task.

Employers who are concerned about an employee’s post-employment activities that may not be captured by a documented post-employment restraint should, nonetheless, seek legal advice in respect of their position. In some cases, it may be possible for an employer to obtain injunctive relief to prevent a former employee from wrongfully diverting or exploiting a business opportunity that arose as a consequence of the employee’s employment.1

Finally, employers should also ensure that any post-employment restraints contained in an employee’s contract are incorporated (or otherwise, not displaced) by any documentation entered into regarding an employee’s separation from the business (such as a deed of release).

Be Specific

One of the best ways of ensuring that a post-employment restraint is drafted so as to be enforceable is to be as specific as possible with respect to the activities the employee is restrained from undertaking. This is particularly so in the case of broad non-compete clauses which seek to prevent an employee from working with a competitor of the employer. As well as being reasonable in terms of geographical scope and duration, these clauses should take into account the nature of the employer’s business and the employee’s position within it.

In an illustrative case from 2016, an employer was unable to enforce a non-compete clause against its CFO because the way in which the clause was drafted would have prevented her from working for a competitor in any capacity (examples raised during proceedings included “check out operator” or “shelf stacker”). The court refused to enforce the clause because, if it did so, the CFO would be prevented from working in positions in which she could pose no “threat” to her former employer’s legitimate business interests if the clause was enforced.2

This is particularly important for employers outside of New South Wales. While courts in New South Wales are permitted by legislation to “read down” a restraint which would otherwise be too broad so as to make it enforceable, courts outside New South Wales do not have this ability.

Upholding Your End of the Bargain

An employer that wishes to enforce a post-employment restraint should be careful to “uphold its end of the bargain” during an employee’s employment. In one recent case,3 a leading accountancy firm was unable to prevent a senior accountant setting up in competition because it was found to have “repudiated” his employment contract. This “repudiation” came about because of certain changes the employer made to the employee’s role and bonus structure. These changes were said by the court to be so fundamental that they indicated that the employer no longer intended to be bound by the employment contract. In these circumstances, the employer was unable to rely on the post-employment restraints contained in it.

In any event, parties should always aim to ensure that they adhere to the terms of a contract. However, employers may take some reassurance from the fact that they may be able to enforce post-employment restraints, even if they have breached an employee’s contract, if their breach is not so fundamental as to constitute a repudiation of the contract. For example, in a 2015 case,4 another leading accountancy firm was able to enforce a post-employment restraint against a key executive whose business it had purchased despite not paying certain instalments of the purchase price for the business on time. This was (in part) because the late payment, while a breach of the contract, was not found to amount to a repudiation.

Considering the Reason for Termination

When considering whether, or to what extent, to enforce a post-employment restraint, employers should give consideration to the reason and circumstances in which an employee’s employment has come to an end. This may be relevant to both the potential risk a former employee poses to an employer’s business, and whether a court would be likely to hold that it is reasonable to restrain the employee from certain activities. For example, a court will be more likely to enforce a broad non-compete clause in circumstances in which an employee has suddenly resigned and is found to have taken copies of the employer’s confidential information upon doing so, than in circumstances in which an employee has been made involuntarily redundant.

This is because a court may conclude that it is “excessive” to prevent an employee from earning a living in their chosen field when the employee’s employment has come to an end at the employer’s initiative and through no fault of the employee. However, the reason an employee’s employment has come to an end is less likely to be a factor in whether an employer is able to enforce more “particularised” restraint provisions, for example, relating to the non-solicitation of clients, or an employer’s confidential information. This is because such provisions are likely to do no more than is necessary to protect an employer’s existing interests, without affecting an employee’s ability to earn a living.5

Finally, employers should bear in mind that the enforcement of post-employment restraints is not an “all or nothing” process. Often, employers and former employees are able to negotiate an agreed position without the need to resort to legal proceedings. Employers should consider the most appropriate strategy for enforcing restraints on a case-by-case basis, in consultation with their legal advisers.

Key takeaways

  1. While post-employment restraints should be used diligently and strategically, Courts have displayed a consistent willingness to enforce post-employment restraints which are well-documented and properly drafted, taking into account the nature of an employee’s role.
  2. Employers are far more likely to be able to rely on contractual post-employment restraints if they “uphold their end of the bargain” during an employee’s employment.
  3. When considering whether to invest in enforcing a post-employment restraint, employers should have regard to the circumstances of the termination of the employment in question. This may assist in an evaluation of what “threat” a former employee might pose, as well as the employer’s prospects of success.

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.

Our top 5 tips for avoiding employment litigation

All employers want to avoid the stress, cost and downtime associated with litigation commenced by an employee (or former employee). Here are our top five tips for preventing work-related litigation.

1. Establish and document clear expectations

Establishing clear expectations of your employees is fundamental in ensuring that the requirements of the position are met, the employee is a cultural fit for the organisation and you are able to attract and retain good employees.

A thorough position description which highlights the requirements of the role to potential employees before they apply for a position and a clear contract which reinforces when and how work is to be performed will assist in ensuring that both parties are on the same page.

Up to date policies and procedures should also be used to clearly outline operational and legal requirements of your employees in greater detail. That said, your contracts of employment should be drafted so that company policies do not form part of the contract of employment. Training in policies and procedures is also essential.

2. Give constructive feedback

Giving constructive feedback will assist employees to fulfil the requirements of the role and help them grow and develop within the organisation.

While regular performance appraisals are key, do not wait to give positive feedback or address areas of concern. Waiting to give positive feedback may make an employee feel undervalued and delaying addressing areas of concern could create a greater problem.

3. Create a paper trail

Take detailed notes of meetings (particularly if performance/conduct concerns are raised). Having a paper trail documenting the employment relationship and any hiccups that occur along the way may assist in defending against future employment litigation if a dispute arises down the track.

4. Know when to hold ‘em and when to fold ’em

If an employee’s employment is terminated within 6 months of their employment or 12 months for small business the employee will not be covered by the unfair dismissal protections in the FW Act.

Accordingly, if you have raised significant performance or conduct issues during this time and cannot see any improvement in the employee’s performance/conduct you may wish to consider calling time on the employment relationship before the employee can avail themselves of an unfair dismissal application. Be aware that employees terminated during their probationary period may have other options available, such as a general protections or discrimination claim.

5. Get prompt legal advice

When in doubt, and particularly before making a decision to terminate an employee’s employment, consider getting legal advice. In our experience, early legal advice will almost always save money in the long run.

Enforcing restraints: at what cost?

Kathryn Dent, Director and Elizabeth Kenny, Graduate Associate

Restraints of trade are not uncommon features of contracts of employment, particularly those involving mid to senior level managers and executives, but to what extent should your organisation consider trying to enforce any breach or imminent breach and what factors will a court give weight to in its decision (usually whether or not to grant injunctive relief)?

Contractual obligations post-termination, known as “restraints of trade” or “restrictive covenants” are generally used to prevent employees from engaging in a range of activities after their employment comes to an end such as not dealing with or approaching clients, not soliciting clients or employees and not competing with their former employer. Despite the fundamental principle that post-employment restraints are void as against public policy, over the years the law, through the varying Australian jurisdictions, has developed such that restraint clauses may be valid and justified in the circumstances of a particular case provided that the employer can demonstrate how the restraint reasonably protects the legitimate business interests of the employer. Organisations therefore need to be able to articulate to a court, in pursuance of such relief, what the interest is that they are seeking to protect, how the ex-employee is able to cause damage to it and that the way the employer is proposing to prevent this damage is reasonable in all the circumstances.

People must be able to earn a living – you can’t necessarily stop your competition

Non-compete clauses which operate to stop your ex-employees from working for a competitor tend to be the most difficult type of post-employment restraint to enforce. Courts are loathe to uphold these clauses where to do so would impose a significant and detrimental impact on a person’s ability to earn a living and certainly where it is only on the basis of prohibiting employees from working with a rival organisation.

In the case of Marlov Pty Ltd v Murat Col [2009] NSWSC 501, established that to prevent the competition the employee has to have a legitimate interest in business connection or goodwill. It cannot be a “remote or tangential” likelihood of “genuine harm”. There is no protection from mere competition.

On the other hand, a non-compete clause is “a legitimate means by which an employer can prevent an employee from taking unfair advantage of information the employee has gained during the course of his or her employment. It is a means of avoiding the difficulties associated with proving breaches of behavioural restraints — such as an obligation to keep information confidential and not to use it or an obligation not to solicit the clients or customers of the employer for a period of time” (Reed Business Information v Seymour [2010] NSWSC 790). In the case of Pearson v HRX Holdings Pty Ltd [2012] FCAFC 111; the Full Court of the Federal Court upheld an earlier decision in which it was found that a contractual clause which prohibited a company’s founder from working for two years after his resignation was reasonable in order to protect the business – the employee “accepted that he had been a key component” of his ex-employer’s success.

Can clients be stopped from choosing where to direct their custom?

The interest in preserving relationships with repeat or regular clients (as opposed to “one off” clients) has been recognised by the courts on a number of occasions. In Wallis Nominees (Computing) Pty Ltd v Pickett [2012] VSC 82 it was found that the employee was not in a “special category” that justified a restraint clause. The types of factors that were found worthy of a clause restraining an employee from dealing with clients were being a human face of a business, having control over a client’s business or fostering a special relationship. However an injunction was granted in Birdanco Nominees Pty Ltd v Money [2012] VSCA 64 because it was directed at preventing the employee from working for a select set of clients (not all of those of his employer) and it also did not prevent him from practising in his profession as an accountant. An injunction was also granted in OAMPS Gault Armstrong Pty Ltd & Anor v Glover & Anor [2012] NSW SC 1175 to take into account the customer relationships and goodwill that two highly experienced marine insurance brokers would bring to the marine insurance area of any potential employer.

Confidential information – it is legitimate but can you identify it?

The legitimacy of confidential information as an interest to be protected has long been recognised but recent cases have turned on whether an employer can actually identify what that confidential information is and whether the range of confidential information over which protection is sought is too wide.

In Reed Business Information v Seymour [2010] NSWSC 790; advertising rates, website statistics that were not publicly available and brand plans were considered to be confidential, but customer addresses and contact details were not. In coming to this decision the court held that the circumstances a court will consider regarding restraints on disclosure of information include:

“… (a) the extent to which the information is known outside the business; (b) the skill and effort expired to collect the information; (c) the extent to which the information is treated as confidential by the employer; (d) the value of the information to competitors; (e) the ease or difficulty with which the information can be duplicated by others; (f) whether it was made known to the employee that the information was confidential; and (g) whether the usages and practices in the industry support the confidentiality…”

The pivotal nature of being able to identify confidential information was well illustrated in Belleville Properties v Asovale [2014] NSWSC 18 where one of the main reasons the claim for an interim injunction was refused was because the employer could not prove that the confidential information existed and if it did they couldn’t prove why it was confidential. On the other hand, in Wellard Rural Exports Pty Ltd v Robinson III [2013] WASC 89, the employer was granted an injunction in a situation where the former employee denied that he had access to a large volume of confidential information and the information that he did have access to would be outdated by the time he left as the employer was able to pinpoint information which would cause the employer detriment. The employer produced sufficient evidence to show that the employee had access to particular financial data, shipping schedules and price calculating tools that, if used against it, would damage the employer “probably permanently”.

The factors a court will have regard to in determining what is “reasonable”

The reasonableness of a restraint is usually judged at the time the contract is made and primarily relates to the length of the restraint, the geographical area in which the restraint operates and the restrictions that are imposed on the employee. All these should be no wider than necessary to protect the employer who must be able to demonstrate that it has an interest worth protecting including the damage which may be sustained if the restraint was not enforced.

In Properties Northside Pty Ltd (t/as Raine & Horne Manly/Freshwater) v Pickering [2015] NSWSC 310, it was held that it was not open for the employee to challenge a restraint on the ground of unreasonableness when the restraint was the result of a “genuine compromise” between the parties. The original restraint in the former employee’s employment contract had been altered in a deed of settlement when the ex-employee had left the employer and began soliciting clients of the plaintiff through his own real estate agency in breach of the restraint in the deed.

No damages without damage

Since restraints are contractual in nature, an employer must show that they have suffered damage as a result of the breach of a restraint of trade clause. Damages will not be awarded if the breach results in no loss to the employer.

In De Poi Consulting Pty Ltd v Dutton (No 2) [2015], the employee resigned from her employment and began work with a direct competitor the next day. The court read down the non-compete and non-solicitation clauses to two rather than six months (on the basis that they went further than necessary to protect the legitimate business interests) and six months if limited to South Australia as opposed to within 20km of any premises from which it operated. Further, the court rejected the employer’s claim for $185,000 for the loss of 37 files citing that the evidence did not suggest that the employee had undertaken an active managerial or consulting role where she was capable of soliciting clients and the surge in the competitor’s client base was found to be coincidental. Therefore, it was not proven that De Poi was entitled to any measurable loss of damage on account of the breached employment restraint.

Cascading clauses

A cascading clause will not necessarily be unreasonable or uncertain because it contains a considerable amount of covenants with respect to alternative periods and geographical areas. In the case of Bulk Frozen Foods Pty Ltd v Excell [2014] TASSC 58, an employee’s contract stopped him for acting in any of seven specified capacities across fifteen different businesses or activities. Other covenants were also included in this case. Each of the covenants had been stipulated and the court found that there had been a “genuine attempt to define the covenantee’s need for protection” therefore the clause could not be void for uncertainty.

Often cascading clauses are useful in jurisdictions where the courts do not have a discretion (such as in New South Wales) to read down the restraint to make it enforceable.

Minding Your Own Business

Leave your personal problems at home. It’s one of those commonsense sayings that we assume everybody abides by. But what if there’s an employee in your organisation that just can’t help wheeling their cabin sized emotional baggage to work?

How badly can personal issues affect an Employer? 

In a recent unfair dismissal case[1], a manager going through a divorce was justifiably terminated after his circumstances began to adversely affect his work performance. Not only would the manager bring his own laptop to work so that he could prepare his divorce case during business hours, but he allowed his personal issues to impact his employer through his:

  • unresponsiveness to his clients and colleagues; 
  • lack of leadership and guidance as a manager;
  • threatening and erratic behaviour;
  • poor and tardy attendance to work; and
  • bullying claim which was lodged after his manager attempted to discuss performance concerns with him.

The manager took things a step further by drawing the employer into his personal issues by sending his ex-wife abusive messages from his Linkedin account bearing his employer’s name. The messages came to the employer’s attention when the ex-wife called head office to complain about the threatening messages.

The manager’s employment was terminated upon the advice of an independent investigator that concluded his conduct had caused an irreparable breakdown in the employment relationship. The manager made an application for unfair dismissal, however the Fair Work Commission sided with the employer that his poor conduct justified termination.

But it’s none of my business

As demonstrated in the above case, an employee whose focus is disrupted by personal problems can have an impact on an employer that is greater than a just a downturn in productivity. Whether or not the allegations were proven, the Applicant, as a manager, failed to conduct himself in a “cooperative and civil way” or show the “desired suite of managerial traits”. 

Employers should not be afraid to take control in circumstances where someone’s private life interferes with their work. Sometimes an employee’s personal circumstances will necessitate leniency but there is a limit on conduct that an employer is expected to ignore.

What can you do?

Mismanaging employees that are dealing with personal issues can increase the risk of an employer facing an adverse action, bullying or unfair dismissal claim. Here are our top five tips for striking the balance between being a compassionate but fair employer:

  • Take preventative action: If you notice someone struggling in the workplace, see if you can point them in direction of the help they might need. Provide your employees with a safe outlet to address their personal challenges by offering Employee Assistance Programs.
  • Speak up: Don’t let your silence be construed as tolerance if an employee engages in behaviour that is inconsistent with the expectations of your organisation. Convene a meeting as a matter of urgency to bring the concerns to a head and propose a resolution.
  • Take a breather: Perhaps the employee and the organisation may benefit from some time apart to deal with the issues at hand. Noting that only in particular circumstances can an employee be directed not to attend work, consider granting a period of leave to the employee if they request it. 
  • Investigate where necessary: Lack of procedural fairness can be an employer’s undoing in termination disputes. Investigate grievances that involve the troubled employee, ensuring each party has the opportunity to have any mitigating circumstances heard. Consider using an independent third party for guaranteed impartiality.
  • Set the scene: If an employee is commits serious breaches of their obligations to their employer, a written warning or dismissal may be warranted. Make sure you include sufficient detail and context in your warning or termination letter to make clear to the employee (and potentially the Fair Work Commission) why you have taken disciplinary action.

Are restraints of trade anti-competitive?

Late last year, the Supreme Court of Tasmania (in Bulk Frozen Foods Pty Ltd v Excell [2014] TASSC 58) upheld a restraint of trade which imposed on the Defendant a total of 8,190 separate non-compete covenants. On one argument, this decision is yet another that demonstrates the anti-competitive nature of restraints of trade. However, this argument needs to be balanced against the need for employers to prevent employees using information and knowledge gained during the course of employment when those employees leave the organisation.

Contrary to the argument that restraints of trade are anti-competitive, the Tasmanian decision demonstrates the need for employers to frame restraints as more than mere fetters on competition in order to have them upheld.

Non-compete restraints will not be upheld unless they protect a “legitimate interest” of the employer. An employer’s “legitimate interests” are those it has in, for example, its confidential information, customer connections and goodwill.

Restraints that cannot be said to reasonably protect one of these interests will not be enforced. Further, Courts have repeatedly emphasised that non-compete clauses are only enforceable if they do no more than is necessary to protect the employer’s legitimate interests. This means close attention is paid to the scope of the restraint in terms of:

  • prohibited activities;
  • time; and
  • geography.

A restraint will be unenforceable to the extent that it goes beyond what is necessary in these respects.

The appropriate scope of a restraint is always dependent on the nature of the employment concerned. For example, in general terms:

  • executive employees with access to highly confidential information may usually be restrained for longer than non-executive employees; and
  • employees who act as the “human face” of an organisation may generally be subject to more restrictive non-solicitation restraints.

Lessons for employers

Courts have recognised that, in some instances, non-compete restraints, going above and beyond traditional non-solicitation and confidential information restraints, are reasonable means by which an employer is entitled to protect its legitimate interests. However, in order to have such restraints enforced, it is imperative that they are framed properly so as to avoid falling foul of the rule that restraints must not be merely anti-competitive.

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).