Non-compete and restraint of trade in employment contracts

non-compete clause

 

By Jacob Carswell-Doherty

Employers are increasingly taking former employees to Court to enforce restraint of trade clauses in a contract following a termination/resignation of employment, but where does the balance lie in protecting each parties’ interests?

Generally, restraint of trade disputes concern:

1. use of confidential information;

2. non-compete clauses; and

3.poaching of employees by former employees.

Confidential information

Confidential information of an employer (loosely defined as any of the employer’s information, not in the public domain) is protected. When employees leave their employment for whatever reason, they should be extremely mindful that they do not retain any of their former employer’s confidential information. This includes such things as financial information, client lists, trade secrets and intellectual property. If an employer has evidence that an employee has taken confidential information, they can commence proceedings against the employee, seeking various forms of relief including damages and costs.

The increasing reliance on smartphone and cloud-based technologies means that employees may have confidential information of their former employer, without even knowing.

Non-compete and restraint of trade clauses

Simply because an employment contract contains a restraint provision, does not necessarily mean it is enforceable and it may be void.

The law in New South Wales is as stated in the case of Write v Gasweld (1991) 22 NSWLR 317:

An employer is not entitled to protect himself [or herself] against mere competition by a former employee, and the corollary of that is that the employee is entitled to use skills, experience and know-how acquired in the service of the former employer in legitimate competition…

However, the Courts will enforce a restraint if it is to protect the legitimate business interests of the employer, as long as those interests are important enough and the restraint goes only as far as necessary.

Some things to consider in relation to restraint clauses:

  • Is the geographical area is too large (in that, there is no geographical limit set)?
  • Is the period of time that the restraint operates for too long?
  • Are the activities that it seeks to restrain clearly defined?
  • Has any specific business interest that reasonably requires the protection of the post-termination non-compete restraint been identified?
  • Are the parties whom the former employee is restrained from providing services to certain?

Depending on the answer to any one of these questions there is a good chance some or all of the restraint clause will not be enforceable.

Courts have modified or “read down” some restraint clauses, but are only willing to do so if the restraint clause in the contract is capable of amendment easily.

Poaching employees

Courts see anti-poaching clauses as similar to non-compete clauses in many ways, because at the heart of it is competition. Generally, Courts have said:

“…the employee has the right to work for the employer he wants to work for if that employer is willing to employ him.”

In Hanover Insurance Brokers Ltd v Schapiro [1994] IRLR 82, senior directors and a senior manager of an insurance broker, having resigned their employment, established a rival business. Their employer sought to enforce covenants in their employment agreements which included covenants that, for twelve months after termination of their employment, they would not solicit or entice any employees of the company to the intent or effect that such employee terminated that employment.

The insurance broker argued that its staff were important assets of the business and necessary to maintain the goodwill of the business. Whilst the Court saw the point of the argument it thought “…that does not make the staff an asset of the company like apples or pears or other stock in trade, nor does it entitle [the insurance broker] to impose a covenant against competition on the [former director and managers].”

There are authorities in which covenants specifically restraining former employees from enticing other employees from the same employer to leave to work for the former employer were upheld. It depends on the circumstances of each individual matter, but this seems to be an exception for such covenants to be allowed.

In summary, a covenant against poaching employees of a former employer is not necessarily invalid if the employer is able to demonstrate a legitimate interest against this particular form of competition, but the restraint will be invalid if it goes wider than is necessary to protect such an interest.

Links to other articles:

We have also written about the benefits of offering undertakings

Unfair dismissal

Post-employment restraint of trade – clients & customers.

Court enforces restraint of trade to protect confidential information.

Employees have duties under Corporations Act when it comes to confidential information.

Employment law page

Intellectual property and employees

If you have a question in relation to a post-employment non-compete or restraint of trade clauses, or anything employment law related, then please contact one of our Sydney employment lawyers on (02) 9232 8033.