Many employment contracts contain clauses which limit an employee's right to work once the contract has ended, commonly known as restraint of trade clauses.

The courts have long considered it to be against public policy to limit a person's ability to work. Accordingly, restraint of trade clauses are void – and can therefore be struck out of a contract – unless they are considered to be a reasonable restraint to protect an employer's legitimate business interest.

One might therefore think that a clause which prevents an employee from working in any capacity whatsoever, anywhere in the world, in a business or operation that is similar to or competes with the original business or its subsidiaries for a period of two years, would be entirely unreasonable. However, in Pearson v HRX Holdings Pty Ltd & Anor1, in which Mr Brent Pearson sought to have his restraint of trade clause with his ex-employer struck out, the court upheld just such a clause.

Some of the facts giving rise to this decision were as follows:

  • Mr Pearson was active in the establishment and direction of his ex-employer, HRX Holdings Pty Ltd ("HRX");
  • Mr Pearson was the primary presenter to prospective clients in its endeavour to secure business;
  • Although HRX only had clients in Australia and New Zealand, it had tendered for work in other areas and was actively seeking business opportunities outside those jurisdictions;
  • The restraint clause was actively negotiated between HRX and Mr Pearson, and Mr Pearson obtained legal advice prior to agreeing to it2;
  • The restraint clause provided for Mr Pearson's salary to be paid to him by HRX during all but three months of the restraining period (subject to reduction if Mr Pearson obtained alternative employment during that period); and
  • Mr Pearson was also allocated an 8% shareholding in HRX in consideration of entering into the restraint clause.

So what at first appeared to be a rather draconian restraint appears more reasonable.

Enforcing a restraint of trade clause can often seem difficult and certainly Mr Pearson was sufficiently confident of having the clause struck out that he was prepared to take it to the Full Bench of the Federal Court, no doubt at great expense, despite having negotiated, sought advice on and ultimately agreed in writing to the clause.

This case highlights, however, that with carefully considered legal advice and a balanced approach, strict restraints can successfully be imposed.

Footnotes

1Pearson v HRX Holdings Pty Ltd & Anor [2012] FCAFC 111, delivered 17 August 2012

2Mr Pearson's legal advice was that the proposed restraint period of two years was "excessive and likely to be unenforceable..." but that he should "leave this in".

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