Think Before you Act: Enforcing Restraints Strategically
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”.
- Documentation and drafting: post-employment restraints must be properly documented and drafted so that they only impose obligations which are reasonable and necessary; and
- 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.
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).
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.
- 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.
- 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.
- 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.
Other relevant resources
2 November 2014