A lesson for employees and employers

What you need to know about post-employment restraints in NSW

Post-employment restraint clauses are a common feature in most employment contracts. These clauses operate to prevent an employee from taking certain action which would adversely affect their employer following the termination of their employment. Such action may include:

  • setting up or working for a competing business;
  • soliciting clients and suppliers;
  • soliciting employees and contractors;
  • using or disclosing confidential and trade information; and/or
  • assisting or facilitating a third party to do any of the above.

Restraint clauses are becoming increasingly valuable for employers who, in highly competitive markets, are forced to take active steps to protect their goodwill, trade secrets and client networks.

Below is a summary of the key factors that should be considered both when drafting and enforcing post-employment restraints.

Post-employment restraints are typically enforced by an employer obtaining an injunction from a court restraining an employee from doing the things that the restraint clauses are expressed to prevent.

When determining whether a restraint clause is reasonable and enforceable, NSW courts will generally refer to two pieces of legislation: the Restraints of Trade Act 1976 (NSW) which states that restraint clauses are valid to the extent that they are not against public policy and the Competition and Consumer Act 2010 (Cth) which protects an employee’s right to gain meaningful employment.

For a post-employment restraint to be enforced at common law, it must also be determined by a court to be reasonable in its scope and for the protection of the employer’s legitimate business interests.

The test – what is ‘reasonable’?

In determining the reasonableness of a restraint, courts may consider the following factors:

  • the geographic scope of the restraint and its duration of time;
  • the nature of the activities sought to be restrained;
  • whether the restraint actually protects the employer’s legitimate business interests;
  • what was contemplated by the parties at the date the restraint was imposed (usually at the date on which the employee entered into the employment contract) (see Adamson v New South Wales Rigby League Ltd (1991) 31 FCR 242); and/or
  • whether the restraint is unduly injurious to the employee and the public (this may include whether the restraint operates to prevent the employee from earning an income).

Enforceability of restraints

In order to enforce a post-employment restraint, it is likely that an employer will need to demonstrate:

  • clear evidence of a breach of the reasonable restraint provisions;
  • the extent of harm or potential harm suffered by the employer as a result of the breach; and
  • that they have not engaged in any wrongful conduct or conduct which would amount to a repudiation of the employee’s employment contract. This is because a party will not be entitled to equitable relief, such as an injunction, where it has not been ready and willing to uphold its part of the contract (see Crowe Horwath (Aust) Pty Ltd v Anthony Loone (2017) VSCA 181).

Severability of clauses

Courts are generally reluctant to re-write offending restraint clauses. As a result, it is common for employers to draft cascading duration and area clauses which read as independent, severable provisions and which may look like this:

(a) 12 moths(a) Australia
(b) 6 months(b) New South Wales
(c) 3 months(c) Sydney Metropolitan Area

The effect of these cascading duration and area clauses is that they allow a court (if required to determine the issue) to apply a broad (at its broadest, the above restraint would apply throughout Australia and for a period of 12 months following termination of employment) or more narrow (at its narrowest, the Sydney Metropolitan Area and 3 months following termination of employment) interpretation as to what would be a reasonable restraint.

In other words, where one level of restraint is considered to be unreasonable, the employer can seek to enforce a lower level restraint without the entire clause being invalidated.

Of course, the effectiveness of any employment restraint will depend upon the particular facts of the case. If you have any questions or would like advice about your employment contract, please contact us.