The term ‘post-employment restraint of trade’ will not be familiar to everyone.
However, many of us are familiar with clauses in our employment contracts which restrict us from being employed by our employer’s competing business or from starting our own competing business for certain time periods after leaving our current employer.
A post-employment restraint of trade clause is that clause in employment contracts that prevents employees from engaging in certain activities for specific time periods in specified geographical areas after they stop working for their employer.
At first, these clauses may seem unfair and restrictive. Nevertheless, there can be sound reasons why employers seek to include them within employment agreements. These include protecting trade secrets, confidential information or their client base when their workers leave. This is particularly important when dealing with employees who have senior roles.
When seeking to include such clauses into their worker’s contracts, employers should be aware of several matters.
The Clause Must be Reasonable
Generally speaking, courts will strike down any clauses which place restraints on staff which are deemed to be unreasonable. Where this happens, the clause will be void and will not deliver any protection to employers.
When drafting clauses, therefore, employers need to ensure that any restraints which are placed on departing workers are reasonable.
On this score, it is important to note that courts often apply the narrowest possible interpretation to restraint clauses and restrict their application only to what is necessary to protect the legitimate business interest of the employer.
When determining what is reasonable, courts typically consider:
- the geographic area of the restraint and its length of time
- the types of activities sought to be restrained
- whether the restraint reasonably protects the employer’s legitimate business interests
- whether there was an imbalance in power between the employer and the employee at the time of agreeing to the restraint; and
- whether the restraint is unduly injurious to the interests of the employee and the public.
When seeking to reduce their risk of clauses being deemed to be unreasonable and therefore void, employers should consider three strategies.
First, they should think about whether cascading clauses may be warranted.
In seeking to derive maximum protection, employers often draft clauses to achieve the widest possible application. This, however, can backfire where it creates difficulty in separating any unreasonable parts of the clause from the reasonable parts. Where this happens, courts may declare the entire clause to be invalid. This leaves employers with no protection at all.
Cascading clauses can help to prevent this by setting out the restrictions broadly at the start and then cascading it to a much narrower restraint. This enables courts to apply the ‘doctrine of severance’ and give effect to any reasonable narrower parts of clauses whilst simultaneously striking down any unreasonable broader aspects of the clause.
Next, restriction timeframes should be limited.
On the face of it, post-employment restraint of trade clauses are typically void as they are generally considered to be against the public interest. Generally speaking, it is considered that employees should be free to engage in employment of their choosing whilst prospective employers and the public at large should not be denied services of capable and willing employees.
Accordingly, the onus is generally on employers to demonstrate that the restraint is reasonable.
A critical factor in deciding this is the length of time during which any restriction is applied. For the most part, courts consider restrictions which apply for indefinite periods to be against the public interest but are open to enforcing short restraint periods notwithstanding any hardship these may create for employees.
Specifying a reasonably short duration for the restriction, therefore, increases the likelihood for employers that protection which they enjoy under the clause will be upheld.
Finally, one of the easiest ways to ensure that a restraint clause is not struck down on grounds of being unreasonable is by specifying that employees will be paid adequate consideration during the restraint period. Where employers do this, courts take into account the fact that the clause does not impact the ability of the worker concerned to earn their livelihood.
Act Quickly – Seek an Injunction!
Where post-employment restraint of trade clauses are breached, employers need to move quickly to minimise any damage. The fastest way to do this is through an interim injunction. This is a court order that requires a person to do or refrain from doing a certain act during a specified period, until the matter comes to trial or until any further order is made by the court in the matter.
This delivers temporary protection to the employer’s business whilst the matter is being resolved.
As can be seen from the above discussion, careful wording is needed for post-employment restraint of trade clauses.
Points to keep in mind are:
- Would the employee be privy to confidential information, client details, trade secrets etc.?
- Would the employee be interacting with the employer’s customers and to what extent?
- What is the geographical limit and the duration of the restraint?
- Is the employee getting compensated during the restraint period?
- What type of work is the employee prevented from undertaking during the restraint period?
- Does the restraint extend only to direct competitors of the employer or indirect competitors as well?
By Paul Cott, Principal Lawyer, Law on Lydiard