Restraints of trade in Employment Agreements

Employment Law: 23 March 2019

For Employers: Does your current employee agreement include a restraint of trade clause? Your business and FUTURE business could be at serious risk without one.

This blog explores the enforceability of employment restraint of trade clauses post-employment in Victoria.

Types of restraints may include;

• those prohibiting use of confidential information and intellectual property acquired through employment (non-disclosure clauses) or
• the solicitation of previous customers (non-solicitation clauses) or
• wider clauses commanding an obligation on the employee not to compete with the employer for a defined period after the termination of the employment (non-compete clauses).

Employers, if successful in their application to Court, can obtain an injunction preventing a former employee from doing X to prevent detriment being done to their business for a reasonable period of time.

A recent decision by Justice Dixon in  the Victorian Supreme Court dealt with the test of applicable principles in enforcing restraints.  In Epichealth Pty Ltd v Yang [2015] VSC 516 , the Judge stated importantly that the principles applicable to the enforceability of contracts in restraint of trade are well settled. This should ultimately give a good degree of certainty to employers about what exactly they are up against legally if they choose to litigate in the post-employment period. The enforceability principles are as follows;

1. Contractual provision in restraint of trade is, prima facie void.
2. The presumption can, however, be rebutted and the restraint justified by the special circumstances of a particular case, if the restriction is reasonable by reference to the interests of the parties.
3. The validity of the covenant in a contract is to be judged as at the date of the Employment Agreement.
4. A stricter view is taken of covenants in restraint of trade in employment contracts than those contained in contracts for the sale of a business.
5. The onus of proving the special circumstances justifying the restraint is on the person seeking to enforce the covenant.
6. So far as the parties' interests are concerned, the restraint must impose no more than adequate protection to a party in whose favour it is imposed. If the court is satisfied that the restraint confers greater protection than can be justified, there is no further issue of reasonableness.
7. The meaning of the restraint clause may be construed by reference to the factual matrix, documentary context and surrounding circumstances 

Didn't quite understand that? In a nutshell, this decision means that it is up to the employer to provide evidence to the Court in the form of special circumstances that would make issuing the restraint reasonable in the circumstances. The legitimate business interests of an employer, which may be the subject of protection, most often will include proprietary interests including; the employer's trade secrets, intellectual property, confidential information,  goodwill - including customer base and connections. Skills that are ordinarily obtained and are reasonably relied upon throughout the course of the employees employment will be set aside by the Court in determining whether special circumstances truly exist. It is therefore imperative if you are operating in a highly confidential industry or niche market, for your employees contracts to contain restraint clauses. This is because the Courts are more likely to provide injunctive relief if you have something special that is unique to your business to that requires protection from future exploitation.

It is worth noting that mere competition (or the likelihood of) by a former employee against their former employer will  not be enough in itself to warrant  injunctive relief. A non-solicitation clause may prevent a former employee from approaching clients of the former employer, but this can only be for a reasonable period of time. As a general guide and depending on the facts this can range from anywhere between 3 months to three years. Clauses will often also include locations and distances which preclude former employees from competing in a particular area (again if reasonable). This is where a considerable amount of litigation originates as what is 'reasonable' will ultimately be dependent on the facts of each case with an objective analysis of the marketplace concerned.

The importance of protecting your business in the post-employment phase through carefully constructed restraint clauses is incredibly important. At the end of the day, all that you've worked for as an employer could potentially come in one door and leave straight out the other if diligent care isn't initially taken at the employment agreement phase!

The Workplace Relations Team at Aitken Partners can assist with drafting employment agreements and appropriate restraint clauses, tailored specifically for your business needs and requirements.