Australia: What does a reasonable employment restraint look like?

Last Updated: 8 November 2017
Article by Roland Hassall

There's no "cut-off" for restraint clauses, but very few employers seek to restrain post-employment activity for more than 12 months. That's because, at common law, restraints are contrary to public policy; that a person may freely carry on their trade. Restraints may involve non-competition or non-solicitation. To be enforceable, restraint of trade clauses must be reasonable. A court will test reasonableness by considering if the clause protects the legitimate business interests of the enforcer and if it is in the public interest. It will also take into account all of the circumstances and balance the employer's business needs with the burden on the employee.

Generally, non-solicitation clauses are easier to enforce than non-compete clauses. While there is no hard and fast rule, a reasonable restraint period (for non-solicitation) is often considered to be between three and 12 months after termination, subject to industry-specific and individual considerations. This hinges on the context of the restraint, including the seniority of workers and the relationship they have with customers and/or clients.

However, in two recent cases courts have enforced longer restraints, which involved non-compete clauses. So, in what circumstances would it be reasonable to impose lengthy and burdensome restraints against individuals, particularly involving a non-compete clause?

Protecting the goodwill of your business

In Southern Cross Computer Systems Pty Ltd v Palmer (No 2) [2017] VSC 460, Mr Palmer sold a 40% share in Southern Cross Computer Systems Pty Ltd. Under the sale agreement he would continue to work for Southern Cross as a key employee and agreed to a four-year post sale non-compete restraint.

Following the sale and while still employed by Southern Cross, Mr Palmer began working for a competitor. Southern Cross commenced proceedings, alleging that by working for a competing business within the four-year period, Mr Palmer had breached his restraint.

Mr Palmer argued that his restraint was void because its scope was not limited to the business's activities at the time of the sale and included a restraint against performing in competition with any activity undertaken by Southern Cross within the restraint period.

The Court considered the reasonableness of the restraint and the substantial consideration paid for goodwill in a business. It noted that more onerous restraints may be justified in a business sale where they are necessary to protect the goodwill of the business. However, the restraint must be confined to the employee's knowledge and experience in that business and to the business's activities at the time of the sale.

Noting the agreement provided for Mr Palmer to work for Southern Cross during the restraint period, the Court upheld the restraints and prevented him from working in a competing business for the four-year period.

Go for broke

In Dargan Financial Pty Ltd ATF the Dargan Financial Discretionary Trust v Nassif Isaac [2017] NSWSC 1077 Dargan Financial Pty Ltd engaged mortgage broker Mr Nassif as an independent contractor. Under the engagement:

  • the company would originate and manage loans with credit providers
  • the broker would obtain the loans and submit them through programs provided by the company
  • both parties were to receive commissions throughout the life of the loan, and
  • the broker would be subject to a 10-year restraint on use of confidential information and 18-month long non-compete and non-solicitation restraints.

When the service agreement was terminated, the parties re-negotiated the restraints and agreed to allow the broker to continue to provide services to the company's clients that were the broker's family and friends.

After commencing with a competitor, the broker provided a list of clients to his new secretary to send them Christmas cards. Nine clients who received cards (but who did not fall into the agreed family and friends list) switched their loans to the broker's new company.

Dargan Financial commenced proceedings alleging the broker breached contractual and equitable duties.

Ultimately, the Court accepted that Mr Nassif had misused the client list and the company's confidential information, and accepted approaches from the company's clients.

Despite contentions from the broker that the client names were available on Facebook (thus in the public domain and no longer having the necessary quality of confidence), the Court accepted that the client list contained commercially important information such as financial positions and borrowing capacity.

The Court upheld the confidentiality and non-compete restraints for the maximum terms of 10 years and 18 months, respectively. Regarding the reasonableness of those restraints and periods, the Court noted that:

  • restraint of trade clauses that seek to protect confidential information and non-solicitation of clients are reasonable restraints and generally not void
  • the confidentiality clauses were reasonable for a 10-year period to protect the company's interests, as without the broker using their client list and interfering with those relationships, the company would have retained the clients for that period, and
  • the broker's relationship with clients throughout the loan process before, during and after meant it was reasonable to restrain him from using the confidential information to solicit those clients for 10 years to protect the goodwill of the company's business.

Important lessons for employers

Restraint of trade clauses are unenforceable at common law, however the above cases are examples of exceptions to that rule. Failing to properly draft a restraint of trade clause can render the clauses void and unenforceable. Important factors to consider include:

  • It is against public policy to enforce restraints that impact on an employee's ability to compete in the employment market. Restraint clauses should be limited to what is necessary to protect goodwill.
  • Restraint clauses must be confined to your business activities at the time the clauses become operative and not refer to future business activities.
  • Restraint clauses must be clear and properly reflect the geography, time frame and business activities to which they intend to apply. Ambiguity or other effects of poor drafting can render the restraints unenforceable.
  • Restraint clauses should reflect the seniority, knowledge and client relationships of the employee they seek to restrain.
  • Restraint clause periods should be reflective of the length of the client, customer or product relationships.

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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Roland Hassall
 
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