The employer/employee relationship can be a fragile one. Each party comes with its own set of expectations around what its responsibilities are, as well as that of the other party. Sometimes these expectations overlap. But when they don’t – both sides can be in for a rocky ride.
Even more importantly, these expectations don’t always end when the job does. The contract may have included provisions that govern what a former employee can and cannot do when they finish working for a company. Often, these provisions are in the form of ‘employee restraint clauses’.
So what is an employee restraint clause? When can it be used? How do they work, and what can you do when they don’t?
Employee restraint clauses (sometimes called ‘restraint of trade’ clauses) are used in the context of a work setting. While restraint of trade clauses can be engaged in various other circumstances (such as shareholder agreements, franchise agreements and business sale agreements), for our purposes we’ll focus on employment contracts only.
When an employer uses an employee restraint of trade clause in an employment contract their intention is generally to protect their business interests. The goal would be to safeguard the company’s IP, client information, trade secrets and other confidential or sensitive information.
The premise is that an employee should not be able to use the information they gained while working for the company to compete with or negatively impact them later. For example, these types of contracts might put limits on when an ex-employee could launch their own business in direct competition with their former employer or when and how they can contact a company’s clients for their own business purposes.
Employee restraint clauses typically come into effect after the employee has ceased work with the company. Sometimes, however, they can also apply during the employment period.
In generally, employee restraint of trade clauses typically cover things like:
It is important to keep in mind that in NSW, restrictions like these will typically be limited by both time and geographical area.
An employer can’t simply use an employee restraint clause any way they like. There are important limitations.
The biggest hurdle that an employee restraint clause will face is the reasonableness test. For a clause to be reasonable, it must establish two things:
Whether or not it will be considered reasonable will be up to the courts to decide. They will take into account factors such as whether the parties were able to negotiate, the bargaining position of each party, the nature of the particular company, the characteristics of the former employee’s role, the compensation provided for the clause and the timeframe and the geographical area applied.
A legitimate interest is generally considered to be something that’s a commercial interest that if used by the employee could cause damage to the employer. It could also be something that damages the goodwill in a company.
Employee restraint clauses are treated differently in NSW compared to other states. In NSW, the presumption is that an employee restraint clause is enforceable. This means that an employee has to prove it is unenforceable in order to obtain a ruling in their favour. (In other Australian jurisdictions, however, the presumption is that the clause is unenforceable – meaning that the employer has to prove it is enforceable.) Employee restraint clauses are therefore more likely to be upheld in NSW compared to other jurisdictions.
The particular facts and circumstances of each case will determine whether a restraint of trade clause is enforceable.
Where an employee restraint clause is unreasonable or unenforceable generally the court will first try to strike it from the contract. However, where this is unable to occur, they may consider the entire contract to be null and void. Therefore, it’s very important to get these clauses right within the contract from the beginning.
One way to get more confidence that your employee restraint clauses will work is to opt for what is known as a cascading clause. A cascading clause is a one that provides several variations that will apply within a contract depending on the specific circumstances.
Cascading clauses are typically presented in descending order, with each option offering a different time period and/or geographical area for the clause to apply to. The effect of a cascading clause will be to minimise the likelihood of an entire clause being struck out by the court, by providing additional options for the court to consider. The court may strike out a top restraint that it considers unreasonable, but may rule that the alternative offered below is reasonable and therefore enforceable.
This is a great approach for employers because it will increase the chances that at least part of their clause will hold up in court.
Employee restraint clauses can be complex. And you don’t want to have to go to court to find out if their reasonable or enforceable! Instead, get an experienced and knowledgeable legal expert on your side who can ensure that your contracts (and all restraint of trade clauses!) are drafted to get the best outcomes for you.
At Patrick Dawson Law team we share our expert advice with employers, draft employee restraint clauses and cascading clauses and ensure existing clauses are reasonable. On the other side of the coin, we can also support employees who have been hit with unfair employee restraint clauses and help them to fight for an equitable outcome.
If you need help with employee restraint clauses or any other commercial law matter, you can find more free resources and blogs on our website. Please contact our team today if we can help to protect your livelihood.
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