Did you know that employment contracts can stop employees from working for competitors, even after they have resigned? A properly drafted ‘restraint of trade’ clause can impact employees long after they have changed jobs.
The main employment restraints are:
- Confidentiality: an employee may be restrained from disclosing any secret or confidential information obtained during the course of employment. What is categorised as ‘confidential information’ will generally include the employer’s clients (and potential clients), suppliers, financials, systems, processes and trade secrets.
- Non-Solicitation: the employer may prohibit the employee from approaching the customers, suppliers or employees of the company
- Non-Competition: in some circumstances the employer may even be able to prohibit employees from working for competitors or in the same industry.
Are employment restraints actually enforceable?
Yes, restraints are enforceable if drafted correctly.
When enforcing an employment restraint, the court will consider the extent that it is ‘reasonably necessary’ to protect the employer’s legitimate interests. What is ‘reasonably necessary’ will depend on the wording of the clause and the facts of each situation. In particular, the court will consider:
- The duration of the restraint. Generally, the shorter the restraint period, the more likely it will be enforceable;
- The geographical location of the restraint. If the location of the restraint covers a large area (for example, all of Australia or the world), the court will be less likely to consider the restraint reasonable;
- Whether the parties negotiated the restraint clause and whether they had equal bargaining power; and
- The nature of the employer’s business and the employee’s role. The Court will be more likely to enforce a harsher restraint where the employee was senior or if the employee was also an owner of the business.
To overcome some of the above issues, employment restraints are generally drafted in a cascading fashion. This allows the court to ‘read down’ the clause until one of the restraints are considered reasonable.
As an employer, what can I do to ensure employment contracts are enforcable?
The first place to start is to make sure the restraint clause itself is drafted correctly. You can also make sure you regularly assess the needs of your company and what you reasonably need to protect. This may change with each employee’s position and the confidential information or client contact they have.
Should you need to dismiss an employee, you should take the opportunity to remind them of their employment restraints and their obligations post-termination. If the employee subsequently breaches their employment restraints, you should act quickly to demand that they cease.
For further information regarding employment restraints, please contact the Taurus Legal Management team on 9481 2000.