In an old Greek fable, a dog lay asleep in a manger filled with hay. When hungry cattle came to eat the hay from the manger, the dog refused to let them near, despite the fact he himself could not eat the hay. The metaphorical maxim of the fable is to refrain from denying others something you yourself cannot use.
Aesop ‘s fable of the dog in the manger is strangely similar to the general principles which underpin the substantial body of law regarding post-employment restraints.
While the courts have certainly recognised the merit of the metaphor by Aesop, it has also been recognised that in some instances, such ideas are excessively simplistic for the purposes of any application at law. This is even more so the case in today’s world where such clauses are becoming increasingly necessary for businesses to protect their legitimate interests, including trade secrets, confidential information and client bases.
The result is that the validity and enforceability of post-employment restraints require the court to consider an extensive range of factors on a case-by-case basis. While the standard position of the courts is that such a restraint is void, a post-employment restraint clause may be enforced if it can be shown to be reasonable in the interests of both parties and the public, as per the seminal authority of Nordenfelt v Maxim Nordenfelt Guns Ltd [1894] AC 535.
It is important to note that for employment matters, restraint clauses will not be void under section 45 of the Competition and Consumer Act 2010 (Cth) on account of the exceptions prescribed in section 51(2)(b).
Enforcing Post-employment Restraints – Relevant Factors
The rebuttable presumption that post-employment restraints are invalid places a significant burden on employers seeking to enforce such restraints. To overcome this presumption, an employer must establish that it has a legitimate business interest to protect and that the restraint does not exceed what is reasonably necessary to protect this legitimate interest. The factors which a court will consider when determining whether they enforce a restraint are quite broad reaching, and include:
- The quantum of consideration received by the employee in exchange for entering into the contract (the amount the employee is paid);
- The duration of the restraint;
- The extent of the area of the restraint;
- The position and knowledge held by the employee;
- The scope of the activities covered by the restraint; and
- The relative bargaining positions of each party.
These factors are of course highly subjective and can therefore make the enforcement of restraint clauses difficult for an employer. All of the relevant factors are considered in their totality. A closer examination of the more recent case law in Australia on the enforcement of restraints helps to provide a clearer picture as to when these types of clauses will be void, and when they might be enforceable.
The fundamental starting point for any enforceable restraint clause is that it must protect a reasonable business interest. The protection of reasonable business interests can include the protection of trade secrets, business connections and confidential information.
Exclusive service contracts can also be valid in some circumstances. For example, restraints imposed on rugby league players following transfers were found to be valid following the 1991 decision in Adamson & Ors v New South Waled Rugby League Ltd & Ors. The key issue here is that the employer must be able to explain why and how the former employee’s new job jeopardizes the employer’s business.
In Sportsbet v Carpanini [2014] VSC 166 it was emphasised that even though an employee had access to information which might put their business at risk, this is not sufficient to justify enforcing the restraint.
This line of reasoning was echoed in Fairfax Media Management Pty Limited v Harrison [2014] NSWSC 470. The fact that the employer has alternative means to protect their business interests also serves to decrease the likelihood a court will enforce a post-employment restraint clause.
The question as to what constitutes a reasonable business interest is not generally the main issue in cases regarding the enforcement of restraint clauses – instead, it is the question as to whether the terms of the restraint are reasonably necessary to protect such interests. The relevant factors here include the duration, scope and area of the restraint.
For example, the 2014 decision in the Sportsbet v Caprpanini case by the Victorian Supreme Court found that the scope, duration and area of the restraint rendered it unenforceable. In this case, Sportsbet sought to enforce a restraint which prevented a customer services manager from working or interacting, in any capacity, anywhere in Australia, with any competitor of Sportsbet, for a period of six months. The Court drew particular attention to the phrase “in any capacity”, indicating that this condition will likely void the enforcement of any restraint clause.
In the Fairfax case, a six month restraint clause against a senior executive who left the business to take up a CEO role at a competitor was found to be reasonable. This highlights the highly subjective nature of this area of law. The relevant factors in this case included the seniority of the employee, the time it would take Fairfax Media to replace him, the confidential strategic planning information he had access to and the contacts he had developed with clients.
A six month period of restraint was also found to be reasonable in RNTT Pty Ltd v Constable [214] SADC 78 where the former employee had been at the company for nearly 20 years as the principal client contact, and in Andrews Advertising v David Andrews [2014] NSWSC 318, where the former employee had also been the principal contact for the company’s primary client.
From a purely practical point of view, an employer must also act quickly and refrain from indolence in order to have any chance of having a restraint clause enforced. In Fairfax, the employer took four weeks to initiate court proceedings. The Supreme Court considered this delay to be excessive, considering the restraint itself was due to only last for a further seven weeks.
How Can Employers Ensure Post-employment Restraints are Enforceable?
Whether a restraint will be enforceable is a subjective question which is determined at the discretion of the courts. However, it is possible to maximise the chances of a court enforcing a restraint clause by taking the following steps:
- Identify the legitimate business interest to be protected by the clause;
- Identify why and how the relevant employee’s departure from your business poses a threat to this interest;
- Refrain from using generic and broad terms when drafting the restraint clause, and instead make it relevant to the particular employee to whom it applies. Consider factors including:
(a) The employee’s position and seniority in the business;
(b) The specific knowledge and information which you want to prevent the employee from using to the detriment of your business;
(c) The precise behaviours you want to prevent. This could include employment and confidential information sharing with a direct competitor, the sale of information to competitors or the use of client and customer contacts.
- Carefully consider and limit the scope, duration and area of the restraint to extend only to what is necessary to protect your interests. The wider the scope, duration and area of a restraint, the less likely it is to be valid. A restraint clause which includes a number of varies terms is now common practice, allowing the most restrictive term that is valid to remain enforceable;
- Consider regularly reviewing and updating the restraint clause, particularly when an employee is promoted;
- Consider including a provision for payment to be made to the employee during the period of restraint;
- Ensure the employee has ample opportunity to consider the contract and obtain legal advice before signing the contract.
Protecting business interests is of critical importance for any employer. In contrast, the rights and interests of former employees must also be maintained and balanced against the often competing interests of their former employer. The law concerning post-employment restraint clauses is far from being straightforward – but necessarily so.
Should you require any assistance in relation to post-employment restraints, contact Stephanie Philippou or Carl Hagon of our commercial litigation team.
This article was prepared by Conor Gillam and Stephanie Philippou.
