The Facts

Man signs employment contract containing post-employment "restraint of trade" clause

In 2003, a nineteen-year-old man began employment as a trainee accountant with a major accounting firm in Perth. He signed an employment contract that included a post-employment "restraint of trade" clause.

Restraint of trade clauses are often included by employers to protect their client relationships should an employee leave and start up work in competition.

However, clauses of this nature are not always easy to enforce because the law recognises that it is not in the public interest to restrict a person's ability to earn a living or to restrict healthy competition between businesses. The onus to prove that a particular restraint clause is "reasonably necessary" to protect "legitimate business interests" therefore rests with the employer.

Restraint clause prevents man from acting for former clients

The clause in this agreement sought to prevent the employee from doing work for any client of the firm if he had provided accounting services to that client at any time in the three years before he left the firm.

If the employee breached this clause, then the contract specified he was to pay liquidated damages to the firm in a sum equal to "75% of the fees incurred by the client" in the last full financial year that the firm had acted for the client.

Employee develops close relationship with client

The employee remained with the firm for over six years, and although he did not obtain professional accounting qualifications during this time, he was eventually promoted to the role of supervising accountant.

The employee dealt directly with clients in his role and formed a close relationship with one client in particular, who he did work for on a recurring basis.

Employee leaves but continues to work for clients

In 2009, while still working part-time at the accounting firm, the employee began to work directly with that client three days per week. Two months later, he resigned from the accounting firm and started working for a rival accounting firm in Perth on the other two days of his working week.

Shortly after, the client sought quotations from the employee's former and current firms. The client subsequently terminated the retainer with the former firm in favour of the new, rival firm.

The former firm commenced proceedings against the employee for damages for breach of the restraint of trade clause, claiming a sum equivalent to 75% of the fees for the client (and other smaller clients) for the year to 30 June 2009. It was for the court to determine whether the clause in this case was reasonably necessary to protect a legitimate business interest of the former firm.

case a - The case for the employee

case b - The case for the employer

  • I did provide services to people that had been clients of the firm while I worked there, but I did not provide "accounting" services within the meaning of the restraint clause because at no time during my employment with the firm was I ever a chartered accountant or taxation agent.
  • This is demonstrated by the fact that all work I performed at the firm was always subject to review and sign off by a more senior, qualified staff member.
  • It would be unreasonable for the restraint clause to apply to junior employees; would the firm be permitted to restrain a receptionist in this way, for example?
  • The damages clause is extravagant and unconscionable in its application to me as a junior employee. It is not a genuine pre-estimate of the firm's loss and damage and therefore amounts to a penalty, which is not permitted by law.
  • The restraint clause goes way beyond what is reasonably necessary to protect the firm and they should not be allowed to enforce it against me.
  • We introduced the clients to the employee and helped him to build up a connection with those clients. The goodwill in those relationships is a legitimate business interest that belongs to the firm, not to the employee, and we deserve to be compensated through the payment of damages.
  • Although not a qualified accountant, the employee was a para-professional performing ongoing work for clients, and therefore had regular and direct contact that enabled the establishment of a strong client relationship.
  • The restraint clause is not unreasonable and does not prevent the employee from earning a living. Indeed, there is nothing stopping him from providing accounting services to any client, the clause simply requires him to pay us the liquidated sum or damages that we have suffered if he performs work for a client introduced to him while he was at our firm.
  • The liquidated damages are a reasonable pre-estimate of the cost to acquire a parcel of fees of clients in an accounting practice and does not amount to a penalty.
  • The restraint clause does no more than what is reasonably required to protect our legitimate business interests and the employee should pay us damages.

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

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

Clayton Davis
Employment law
Stacks Law Firm

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.