Consider this scenario. You have trained up a bright young salesperson who you thought was going to stay with your business for many years and that salesperson has built a relationship with some of your best clients. Out of the blue, the salesperson resigns and you stop hearing from those clients. You later find they have given their business to your old employee, who is either with a new employer (your competitor), or has set up their own business.
What can you as an employer do about these situations? This depends on the quality of the restraint provision in your contract with the employee.
Some restraint is better than no restraint
It is trite to say that every employee should have a signed employment contract. In this context, even a poorly worded contractual restraint may be of some value. But if you don’t have a contractual restraint, then there is nothing on the face of it to prevent an ex employee poaching your clients or customers or accepting the approach of a (soon to be ex) client once they leave your business. A confidential information provision may by itself be of some assistance in stopping your ex employee from blatantly soliciting your clients for work[1]. However, in the absence of a specific term, implied duties of confidentiality will not generally cover the mere identity of clients.
“A stitch in time saves nine”
Restraints are not things that should be put in the bottom drawer of the desk and forgotten about until an employee tells you they are leaving. Most employment restraint related litigation is about trying to minimise the damage to your business or, put another way, trying to shut the gate once the horse has bolted. Whilst preventing your ex employee from dealing with your clients may be of some comfort, it may be a pyrrhic victory if you have still lost one or more clients.
A good preventative strategy involves the following elements:
- Ensure the contractual post employment restraint is reasonable in the first place;
- Explain the restraint to your employee before they start work and the reasons for the restraint (and make a note of the conversation);
- Ensure that you keep in touch with important clients and referrers and remain “the face” of the firm;
- Review the restraint when considering pay rises or promotions;
- If an employee resigns, make them work out their notice period or stay at home on “garden leave” – and use the time to contact clients (sometimes jointly with the employee) and manage the transfer of their business to other employees or make the time to do the work yourself for some period;
- Remind the departing employee about the restraint;
- Sometimes, it may be wise to take a commercial approach and negotiate a suitable fee if the employee wishes to retain the business of the client and it is clear that you are going to lose the client anyway.
The legal approach to post employment restraints
So, what is a reasonable restraint? The starting point is that a contractual provision which imposes a restriction on the ability of employees to earn their livelihood will be void as a matter of public policy. However, there is also an interest in holding parties to their voluntary contractual obligations. Accordingly, courts will enforce post employment restraints but only where they are clear and only so far as necessary to protect the employer’s reasonable business interests.[2] Whilst an employer is entitled to protect its trade secrets and confidential information and goodwill including customer connections, this does not extend to protection against mere competition with a former employee.[3]
A narrower, more strict, approach is taken to interpreting an employment restraint provision than a commercial restraint.[4] In this context, restraints preventing ex partners from working in competition to their old firm are likely to be more generously interpreted than similar provisions in employee agreements.[5]
The elements of a restraint
A contractual employment restraint normally comprises several types of restraint and time qualifiers on the operation of the restraint. Restraints on employees generally take 3 main forms:
- A restraint from poaching another employee of the employer;
- A restraint from poaching or accepting the business of clients of the employer; and
- A restraint from misusing confidential information gained during the employment.
In most cases, we suggest that the second type of restraint be limited to clients with whom the ex employee has had personal dealings, usually within a period of 12 months before the employment ends. This is the group of people most at risk of taking their business away from the business. Restraints which seek to prevent an ex employee from dealing with all clients, or from working in the same industry for a period of time, are less likely to be enforced by a court, even for quite senior employees.[6]
Restraints are not indefinite in their operation. The most common restriction is on the time for which the restraint operates. You should consider how long may be necessary for you to take steps to salvage your clients and for the ex employee’s influence to wane. The current commonly accepted form of drafting restraint provisions is to allow for several options for the period of restraint depending on the particular circumstances of a case (sometimes called a “cascading” or “ladder” restraint). When drafting the restraint, it is difficult to know precisely the length of restraint which is likely to be called for. Accordingly, restraints commonly provide several options of between 1 and 6 months from the ending of employment (although longer periods of 9 or even 12 months may be justifiable in particular cases).
A shorter period of restraint may be more appropriate for short term or more junior employees whilst a longer period may be suitable for longer serving and/or more senior employees. The benefit of the “cascading” approach is that it allows a court to choose a particular combination of restraints it considers reasonable in the circumstances when considering granting an injunction or awarding damages to enforce the contract. In Queensland, courts cannot rewrite an employment contract.[7] Accordingly, in Queensland, if the only time option included in a contractual restraint is, say 6 months, and the court considers that length of restraint to be unreasonable, then the whole restraint may fall over and be unenforceable.
It is possible to include detailed combinations of restraints as long as the nature of each restraint is clear and reflects a genuine attempt to define the reasonable protections given to the employer. However, a court is unlikely to grant an injunction where there are so many combinations that the restraint amounts effectively to asking a court to write the contract for the parties./[8]
Geographical restraints are more controversial and should only be used where there is a real “face of the business” element and the employee’s influence extends to more than just the clients they have dealt with. This sort of restraint will not often be enforced.[9] If this sort of restriction is included, it should be in addition to alternative, more specific, restraints.
A middle of the road approach would see an anti competition restraint restricted to those clients, potential clients and referrers of work with whom the employee has had dealings in the 12 month period before termination of the employment for a period of up to 6 months. This type of restraint may cover any action by an ex employee to persuade, solicit or even accept an approach by a relevant client, potential client or referrer. A restraint can be effective to stop an ex employee dealing with a client even where the client makes the initial approach.[10] A broader or longer restraint may be justifiable where a business owner sells their business for valuable consideration and is taken on as an employee of the new practise.[11]
The contractual provision should also contain acknowledgements that:
- each restraint has effect as an independent provision and severance of any of the restraint provisions won’t affect the validity of the remaining provisions;
- the employee has had the opportunity to obtain independent legal advice and that each specified restriction is reasonable and necessary to protect the employer’s legitimate business interests; and
- the remuneration paid to the employee by the employer for their service includes adequate consideration for the post employment restraint covenant.
Does it matter how the employment ends?
A restraint is prima facie enforceable regardless of whether the employment ends due to resignation of the employee or termination at the instigation of the employer, whether for poor performance, misconduct or redundancy. However, a restraint will not be enforceable where the employer, by its conduct, repudiates the common law contract. In Crowe Horwath (Aust) Pty Ltd v Loone [2017] VSCA 181, the court affirmed that the employer had breached its employment contract with a senior accountant when it unilaterally made changes to a bonus payment scheme and to his role in the firm. The court found these breaches were repudiatory, allowing the accountant to lawfully end his contract. The most common scenarios of repudiation are likely to be those where the employer unilaterally demotes an employee or reduces their pay and the employee decides to accept the repudiatory conduct and leave the employment. Unjustified summary dismissal may also result in the restraint not being enforceable. Unfair dismissal (in the context of a statutory unfair dismissal claim in the Fair Work Commission) will not automatically amount to repudiating behaviour but may be relevant for a court to consider in exercising its equitable discretion whether or not to issue an injunction.
The final word
Clients are difficult to come by and hard to keep, even without the risk of losing them to a departing employee. This risk can be addressed by including a reasonable restraint in your contract of employment and proactively managing the employment relationship and your clients. This will minimise the prospects of having to consider taking action to enforce the restraint in a court, whether by way of injunctive relief or damages. It will also minimise the prospect of having to wave good bye to valuable clients.
[1] See APT Technology Pty Ltd v Aladesaye, In the matter of APT Technology Pty Ltd [2014] FCA 996
[2] See Portal Software v Bodsworth [2005] NSWSC 1179 at [63] – [68] for a useful summary of the principles
[3] Ibid at [65]
[4] Butt v Long (1953) 88 CLR 476 at 486 (per Dixon CJ)
[5] See Pryse v Clark [2017] NSW SC 185
[6] See Just Group Ltd v Peck [2016] VSC 614
[7] Unlike New South Wales – see Restraints of Trade Act 1976 (NSW) s.4
[8] See Bulk Frozen Foods Pty Ltd v Excell [2014] TASSC 58
[9] See Stacks Taree v Marshall [No 2] 2010 NSWSC 77, but cf Emeco International Pty Limited v O’Shea [2010] WASC 348 and Epichealth Pty Ltd v Yang [2015] VSC 516
[10] See Barrett and Ors v Ecco Personnel Pty Limited [1998] NSWSC 545
[11] See Southern Cross Computer Systems Pty Ltd v Palmer (No 2) [2017] VSC 460 but cf GBAR (Australia) Pty Ltd & Ors v Brown & Ors [2016] QSC 234