Employers will often include a post-employment restraint in their employment contracts to protect their interests after an employee leaves their business. These clauses are most commonly found in the contracts of senior and professional employees.
These post-employment restraints are vital in preventing former employees from soliciting clients and current employees. However, in drafting such clauses employers should pause to answer the key question – what is necessary to protect my business? A restraint that is too wide and not carefully considered may ultimately provide no protection.
Post-employment restraints are presumed to be unenforceable unless the employer seeking to enforce a restraint is able to show that the restraint was reasonable at the time it was agreed to.
For a post-employment restraint to be legally enforceable it is necessary to establish:
- the employer had a legitimate interest in imposing the restraint; and
- that the restraint is no wider than reasonably necessary to protect the business interests of the employer.
The courts will consider the particular facts in each case when determining whether a restraint is reasonable. In assessing “reasonableness”, the courts will look at the scope of the restriction, the period of time attached to it, and the geographical area in which it is to operate. This will also consider, the position of the employee and whether the employee received any compensation or remuneration for the restraint. The Court will also consider whether the employee understood and genuinely accepted the restraint.
In 2016, in the matter of Just Group Ltd v Peck  VSC 614, the Victorian Supreme Court had to consider whether a 2 year post-employment restraint was reasonable in relation to a senior employee in the position of Chief Financial Officer who had resigned from her employment after a short employment period of 5 months. The employer sought to enforce a restraint clause to prevent the employee from taking up a position with a competitor.
The employer had made the error of drafting a restraint that was very wide and sought to restrain the employee from working for a wide range of businesses over a significant geographical area which included Australia and New Zealand.
The Court concluded that the restraint was unreasonable and therefore unenforceable. The Court was critical of the restraint and found the restraint went further than was necessary to protect the legitimate business interests of Just Group Ltd finding;
- A list of 50 brands which was included in the restraint, for whom the employee could not work or otherwise be engaged with for the 2 year period, was unreasonable to protect the legitimate interests, particularly as a number of the names brands were not competitors of the employer;
- The restraint period of 2 years was excessive in circumstances where the employer could dismiss the employee on 1 months notice in the first six months of her employment (remembering the reasonableness of the restraint will be considered at the time the employment contract is entered into); and
- the geographical area was too wide.
Comparatively, in the New South Wales matter of HRX Holdings Pty Limited v Pearson  FCA 161, the Federal Court upheld a 2 year post employment restraint in relation to an employee who held a similarly senior position of Chief Operating Officer. In this matter the post-employment restraint was held to be reasonable and enforceable. Unlike the short period of employment in the Peck decision, the employee in HRX Holdings was a co founder and central person within the business.
In deciding that the restraint was reasonable and enforceable, the Court considered:
- the fact that the restraint was clearly the subject of negotiation between the employer and employee;
- the employment contract provided for specific payments to be made to the employee during the restraint period;
- the employee had received compensation for the restraint in the form of shares; and
- the employee, as a co founder of the business, was clearly central to the business with considerable intimate knowledge about the business operations.
The decisions demonstrate the need to ensure restraints are not merely included by way of generic or standard restraint clauses across all employment contracts but rather require careful consideration to ensure that they can be enforced if and when the need arises.
This article was co-written by Employment Lawyer, Emma Sheen.
This article is not legal advice. It is intended to provide commentary and general information only. Access to this article does not entitle you to rely on it as legal advice. You should obtain formal legal advice specific to your own situation. Please contact us if you require advice on matters covered by this article.