Contract of Employment - Post Employment Restraints

In recent years it has become increasingly common for employers to impose post employment restraint obligations on employees which seek to place limitations on a departing employee’s opportunities for future employment.

Despite the increase in popularity, there are still many employers and employees who believe that a post employment restraint in a contract of employment is not worth the paper it is written on. The view that is often taken here is that such a restraint is unenforceable because it constitutes an unfair restriction on a departing employee’s right to make a living through the exercise of the employee’s trade or profession.

There is now an abundance of case law which makes it clear that Courts are willing to enforce post employment restraint obligations against former employees.

Whilst the right of an employee to exercise their trade or profession will always be of paramount concern, the Courts will balance this concern with the right of the employer to protect its business from unfair attack by a former employee.

Generally, Courts will enforce a post employment restraint against a former employee if the restraint is reasonably necessary to protect the legitimate business interests of the employer – in particular the employer’s customer connections and/or the employer’s confidential information.

Following is a list of matters that an employer should take into account when considering the use of post employment restraints:

• It is critical that the post employment restraint is contained in a written contract of employment and that the restraint is carefully drafted.  Neither statute nor common law impose post employment restraints on a former employee’s ability to gain future employment.  Accordingly, the only avenue for imposition of the restraint is in the contract of employment.
• A restraint that prevents an employee from working for all and any competitors in an industry will, in most cases, be unenforceable.  For example, it would be difficult for a law firm to enforce a blanket prohibition on a former solicitor working for a competitor law firm.  That said, a restraint could be used to prevent the former solicitor from working for the old employer’s clients when the solicitor commences employment with the competitor.
• If a restraint is to prevent an employee from working for particular competitors the competitors should be narrowly defined in the restraint provision of the contract of employment.
• If a restraint is to be used to prevent an employee from soliciting their employer’s customers then the restraint should only apply to those customers with whom the employee had direct dealings (or with whom a person reporting to the employee has had direct dealings) in the 12 month period leading up to the employee’s departure date.
• A restraint should be limited in geographical application.  The smaller the geographical region the more likely it will be that the restraint can be enforced.  For example, if an employee only had dealings with customers in Victoria then it may be going too far for the employer to impose a nationwide restraint.
• A restraint should only operate for a limited period of time.  The period of time should be no longer than the period necessary for the employer to recruit and appoint a new employee and for that new employee to build a customer connection.

Where a former employee breaches a post employment restraint obligation the aggrieved employer should consider the following legal remedies:

• Injunction – it would be open for the aggrieved employer to make an application to a Court seeking an injunction to prevent the former employee from continuing to breach the post employment obligations.
• Damages Claim – if an aggrieved employer suffers loss as a result of a former employee breaching a post employment restraint obligation, the aggrieved employer could sue the former employee for damages.

Upon becoming aware that a former employee has breached a post employment restraint obligation the employer should act immediately to enforce its legal rights.  Any delay in the enforcement of legal rights by the employer could significantly prejudice the employer’s legal case, particularly if the employer wishes to make an application for an injunction to stop the offending conduct by the former employee.

Usually the first step in cases where a former employee has breached a post employment restraint obligation is for the employer’s lawyers to write a letter to the employee requiring the employee to immediately cease and desist from breaching their post employment restraint obligations.  The employer will also usually require the former employee to sign appropriate undertakings within a specified period of time in which the former employee confirms their commitment to comply with any post employment restraint obligations.

Any failure by a former employee to sign an undertaking within the specified timeframe can be good evidence to support an application by the aggrieved employer for an injunction.

National Workplace Lawyers can assist employers with the preparation of contracts of employment which contain carefully drafted post employment restraint obligations.  We also have expertise in assisting employers who wish to enforce post employment restraint obligations against former employees. If you would like assistance on any of these issues please contact National Workplace Lawyers on +61 2 9233 3989. 

National Workplace Lawyers

Note — this is for information purposes only and does not purport to be comprehensive or to render legal advice.