Australia: What are the limits of a post-employment restraint clause in an employment contract? Which case won?

Last Updated: 7 November 2018
Article by Geoff Baldwin

The Facts

Employment contract containing post-employment restraint clause signed by CFO

A large clothing retailer with outlets all over Australia employed a chief financial officer (CFO), based in Victoria. The CFO had worked in finance at a senior level in various industries, including apparel retail, although some considerable time prior to the events giving rise to the litigation.

The CFO started working for the retailer in January 2016. She and the company had negotiated an employment contract which included a clause purporting to restrict her ability to work for the retailer's competitors after her employment came to an end.

While the CFO's salary package was substantial (close to half a million dollars per annum), the contract contained a probationary period provision. It was asserted in evidence that this was because while the CFO had previously worked in apparel retail, she had not done so for some time and was instead coming from the health care industry.

CFO resigns to accept employment with competitor

At the start of May 2016, four months after she had started working for the clothing retailer, the CFO tendered her resignation to accept employment with a competitor, another national clothing retail chain. It transpired that the CFO had been in talks with this competitor before resigning.

The CFO's former employer applied to the Supreme Court of Victoria, seeking declaratory and injunctive orders to prohibit her from working for the competitor during the restraint period.

Wording of the restraint of trade clause

The restraint clause was extensive, but its central provision was as follows.

Restricted Activities – Personal Engagement means directly or indirectly:
  1. being engaged, concerned or interested in;
  2. assisting or advising in respect of;
  3. carrying on any activity:
  1. which is the same as, or similar to, any part of the specialty brand and fashion business of a Group Company in which you were involved, or in respect of which you received Confidential Information, in the Connection Period; or
  2. for or on behalf of any of the entities operating the brands listed in Annexure A, their assignees, successors or transmittees (from which, it is acknowledged, BSS and the Group have a legitimate interest in withholding their confidential information and their connections with customers, employees and suppliers).

Annexure A was a list of 50 companies and brands, including the competitor the CFO had decided to join, along with entities such as Target, Kmart, Myer, David Jones and Woolworths.

Cascading provisions in restraint clause

The restraint clause was drafted in line with the current custom of "cascading" provisions. The time length of the restraint was 24 months after leaving employment; or if that were ruled invalid, 18 months; or if that were ruled invalid, 12 months.

In a similar cascading fashion, the geographic area of the restraint was the whole of Australia and New Zealand; or, if that were ruled invalid, Australia; or, if that were ruled invalid, Victoria.

It was up to the court to decide whether the restraint clause should be enforced, or whether it was too broad and therefore invalid.

case a - The case for the employer

case b - The case for the CFO

  • The restraint of trade clause was critical to our business for the protection of confidential information, which the CFO had access to in her senior financial role.
  • The restraint clause was reasonable and was not too broad. It did not restrict the CFO from employment in a position to which our confidential information was irrelevant, nor from working in businesses that do not compete with our company. Further, it did not extend to the retail industry at large, or any other industry.
  • The CFO was hardly a naïve or uneducated candidate who did not understand the contract she signed. She agreed in the contract that the restraints were no more than were necessary to protect our legitimate interests.
  • Prior to signing the employment contract, the CFO was able to access legal advice and negotiate better terms and conditions. However, she chose not to amend the restraint clause.
  • The stipulation that the CFO would not work for 50 specified companies was reasonable, as all but one are clothing retailers in one form or another.
  • In any event, if the court finds that the restraint clause is too broad, it should "read down" the clause by interpreting it in a way which limits its meaning to things which are reasonable for our company's protection, or by "severing", ie removing parts of the clause which are too broad while leaving the rest of the contract intact.
  • The restraint clause is wildly in excess of what is necessary to protect my former employer's legitimate interests.
  • The restraint clause would prevent me from performing activities in my new role such as preparation of year end accounts, bank debt refinancing and attending board meetings – none of which involve activity in competition with the speciality brand and fashion business of my former employer.
  • According to the text of the contract, the restraint clause prevents me from being employed by any retailer of clothing or stationery, which is absurd.
  • The period of the restraint is unreasonable. Because of the six month probationary period, I could be dismissed after three months and then shut out from the industry nationwide for two years, or a minimum of 12 months.
  • The restraint clause prevents me from working for 50 major Australian companies, many of them large enterprises with diverse activities, in any capacity whatsoever, including menial work such as checkout or counter work which I would be unlikely to seek or accept, given my role as a finance executive.
  • For these reasons the restraint provision is so broad as to be unenforceable and should be struck down.

So, which case won?
Cast your judgment below to find out

Vote case A – the case for the employer
Vote case B – the case for the CFO

Geoff Baldwin
Employment law
Stacks Champion

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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