Contact: Mark Poretti
Post-employment restraints are pretty standard in employment contracts these days but do they actually work and are they worth having?
The law says post-employment restraints are only enforceable if they are reasonable.
They need to be reasonable:
- in the interests of the public (for example, the public benefits of competition in the relevant market);
- in the interests of the employee (for example, not limiting their ability to earn a living or use their stock of knowledge, skill and experience); and
- to protect the legitimate interests of the employer (for example goodwill, trade secrets and client connections).
The problem is only a court can actually determine what is reasonable. That should not stop you having restraints in employment agreements. Restraints can be effective as a deterrent and may be enforceable provided they are drafted carefully. Post-employment restraints are particularly recommended for employees whose departure from your business may impact on your goodwill or client connections or if your employees have access to your trade secrets.
Employees are generally mindful of their obligations to you after their employment ends and most will steer clear of doing anything they are restrained from, at least for a period of time and provided the restraints are reasonable. Reasonableness is achieved by considering the real interests to be protected and the best way to protect those interests without restricting a former employee’s ability to earn a living in their chosen occupation.
Post-employment restraints can be about:
- Pinching your clients or customers;
- Pinching your employees;
- Working with a competitor;
- Setting up a business in competition; and
- Protecting confidential information.
There’s no “one-size-fits-all” in relation to restraints or how a court will determine that a restraint is reasonable. While the court may be guided by previous decisions, enforceability of a restraint is decided on a case by case basis. The court will look at whether the restraint is too wide in terms of duration, area and the type of activity restrained given the type of business the employer is engaged in and taking into account interests of the parties and the public. Generally the extent of a restraint will be limited to the time and area in which an employer needs to shore up its client connections and goodwill after an employee leaves. Anything beyond that is likely to be unenforceable.
Cascading or ladder clauses have become a popular way to give the court some options as to what might be reasonable in the circumstances. The advantage for employers is that at least one combination of the restraint is likely to be considered reasonable by a court. The unreasonable parts can be severed without affecting the validity and enforceability of the whole restraint. This basically gives the court a few options to choose from, provided that the clause makes sense. However, that type of clause can be confusing for employees if it is not drafted well and there is a risk the court may decide the whole clause is void for uncertainty.
If you are sure about the extent of the restraints necessary to protect your legitimate business interests and you consider those restraints to be reasonable then you may not need to use a ladder or cascading clause at all. There is a good chance the court will agree and enforce those restraints in the event of a dispute. The risk is if the court does not agree, the whole restraint will be out.
So the question is whether it is better to have a clear and certain restraint clause with the risk it may not be enforceable or a well drafted ladder clause with options above and below the restraint you consider to be reasonable which will give you some level of protection if the court does not agree with your view of reasonableness.
And employers beware! If you take on a new employee who is subject to a restraint and they disclose their former employer’s confidential information to you, you may even be liable for any damages if you have profited from past disclosure.
Like all things in business, protecting your goodwill and client connections is a balancing act. Trying to enforce an unreasonable restraint can possibly do more harm than good to your business reputation and is likely to be very expensive. However, a well drafted and sensible post-employment restraint can be an effective way to cushion the negative impact of employee turn-over and may be worth having in your employment agreements.
For further advice on post-employment restraints or any of other Employment Law advice, please contact Mark Poretti on (02) 6163 5050.