Restraints of Trade: Are you properly protecting your business?
In many cases, employers who wish to save costs use template employment contracts that are often out of date and/or are not tailored to the particular employee. This results in a significant percentage of restraint of trade provisions in employment contracts being void and unenforceable.
Unfortunately, these efforts to save a little now ultimately cost the employer a fortune in the future.
Four common mistakes which you must consider when reviewing restraint of trade provisions in employment contracts
The starting point is that restraints are generally seen as void; unless it can be shown that the restraint is reasonable having regard to the employer’s need to protect its legitimate business interests.Ultimately, this is a question to be determined on the facts of each individual case.Some of the common reasons why the Courts have held restraint of trade provisions to be unenforceable include:
1. The restraint does not protect a “legitimate interest” of the employer
The categories of “legitimate interests” recognised by the Courts are not closed, however, they include confidential information, connection with customers, and recently (though this is not settled law) the maintenance of a stable, trained workforce.
2. The restraint is too broad, in terms of its restriction on the employee’s activities
If the activities in a restraint of trade clause are described too vaguely or broadly or do not specifically relate to the particular duties and responsibilities undertaken by the individual who is being restrained, then the clause may be unenforceable.
Employers should check their restraint clauses to ensure that they are tailored to the specific employee and the activities they perform, rather than having a blanket clause which seeks to restrain an employee from taking employment of any nature whatsoever with a direct or indirect competitor of the employer.
3. The restraint is too broad, in terms of the geographic area within which the employee’s activities are restricted
Generally speaking, the larger the area(s) of the restraint, the less likely it will be reasonable and enforceable. This can often be resolved by cascading clauses, which gives the Court a variety of combinations of restraints to choose from. For example, a geographical restraint might be expressed as prohibiting an employee from working for a new employer anywhere within 10, 20, 50, 100, 200 or more kilometres from the old employer’s place of business. Cascading clauses are also known as “Onion Ring” clauses because the Courts can theoretically peel away the 200km, 100km and 50km rings in order to determine that the 20km restraint is enforceable.
Employers often have a cascading clause which seeks to restrain an employee from working in the same type of role for a competitor anywhere within Australia, the applicable State or the CBD of the capital city. Unless the employee is an executive management level employee of a national or international company and the employer pays the employee during the restraint period this clause will be unenforceable.If this part of the clause is void it generally results in the employee having no restraint which means he/she can set up a business which competes with the old employer’s business in the same neighbourhood.
4. The duration of the restraint is too long
The Courts look closely at a number of factors in determining whether the duration of a restraint is appropriate, including how long the employee worked for the employer, the employee’s role, the employee’s ability to “poach” customers, whether the employee was specifically remunerated for agreeing to the restraint etc. Again, a prudent approach employers adopt is to use a cascading provision (For example; 2 years, 18 months, 12 months, 6 months or 3 months).
Summary
Employers spend a significant amount of time, effort and money teaching their employees everything about the employer’s business. These employees often then have the skills, experience and knowledge to join a competitor business or start their own business in competition with their former employer. An un-restrained employee can poach their old employer’s customers, suppliers and key personnel and join or set up a competing business. This often causes severe damage to the old employer’s business or at the very least costs the employer thousands of dollars. Don’t let this happen to your business!
We recommend restraint of trade provisions be included in all employment contracts (particularly for important and senior personnel). Cascading clauses should be used. Avoid trying to impose unreasonable and broad restraints on employees. If you’re unsure as to whether your restraints are enforceable consider obtaining legal advice.
Our firm has significant experience in this area of law and can assist employers in having strong contracts of employment with enforceable restraint of trade provisions. Given the serious ramifications, we encourage employers to regularly review their employment contracts or refer them to an employment law specialist to do it for them.