A Lesson for Employees and Employers: Post-Employment Restraint in NSW

Understanding post-employment restraint has become an imperative aspect of learning. Often appearing in Australian employment contracts, their significance is still frequently misunderstood. 

Today, we’ll explore the key aspects of post-employment restraint clauses in NSW, diving into their purpose, types, and enforceability and how it is essential for both employees and employers to navigate their obligations and rights effectively. 

What is a post-employment restraint? 

A post-employment restraint, also known as restraint of trade, is a clause in an employment contract that sets boundaries on what an employee can do after leaving their role. These clauses are there to safeguard an employer’s legitimate business interests and ensure fair play.

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.

In New South Wales, courts assess the reasonableness and enforceability of restraint clauses based on two key laws: the Restraints of Trade Act 1976 (NSW), which permits restraint clauses as long as they align with public policy, and the Competition and Consumer Act 2010 (Cth), which ensures employees have the right to pursue meaningful employment.

What is a restraint period in an employment contract?

A restraint period is a clause that sets a timeframe during which an employee agrees to certain restrictions after leaving their role. These restrictions typically range from 3 to 12 months, with the goal of protecting the employer’s legitimate business interests. These interests may include protecting confidential information, trade secrets, client relationships, and workforce stability.

The Restraint of Trade Act 1976 (NSW)

In Australia, New South Wales stands out due to its specific legislation governing restraint clauses; The Restraint Of Trade Act 1976 (NSW) includes the framework in which the court assesses and adjusts restraint clauses where necessary. 

Key features of this Act include:

• restraint clauses are presumed valid but must align with public policy to remain enforceable;
• the Act allows the courts greater flexibility to adjust and enforce restraint clauses;
• courts can “read down” overly broad restraints to make them reasonable without removing entire parts of the clause;
• the restraint can be declared invalid if it clearly goes against public policy, such as failing to make any effort to be fair or reasonable; and
• reasonability is determined on a case-by-case basis, considering factors like the duration, geographical area it covers, scope of restricted activities, and industry and its specific circumstances.

While the NSW framework generally favours employers, the restraint must still be reasonable and necessary to protect business interests. Unreasonable restraints are unlikely to be enforced.

Types of restraint clauses

Restraint clauses come in various forms, each tailored to specific business concerns:

1. Non-competition clauses: these prevent employees from working for a competitor or starting a similar business for a specified period.
2. Non-solicitation clauses: these prohibit former employees from enticing clients or customers away from their previous employer.
3. Non-poaching clauses: these restrict former employees from recruiting colleagues to join a competitor.
4. Confidentiality clauses: also called non-disclosure clauses, ensure that employees do not share or misuse sensitive company information.
5. Non-interference clauses: these prevent employees from disrupting business relationships after they leave.

While these clauses serve different purposes, their enforceability depends on their reasonableness and necessity.

Enforceability of restraint clauses in Australia 

In determining the reasonableness of restraint of trade clauses, 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); 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).

In order to enforce a post-employment restraint, an employer will likely 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 that 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. 

Impact on employees

For employees, restraint clauses can create challenges, particularly when transitioning to new roles or industries. Here are some common impacts:

• Reduced job mobility: employees may face restrictions on working for competitors or starting their own business within the restraint period.
• Career limitations: long non-compete clauses can delay career advancements or changes, especially in specialised industries.
• Financial strain: lower-income workers or those with limited bargaining power are disproportionately affected, as they may struggle to absorb income gaps while adhering to restraints.

Employees are advised to seek legal advice before signing contracts with restraint clauses to understand their obligations and potential limitations fully, as well as if they experience contract breach or negligence. 

Employer’s perspective

According to the Australian Bureau of Statistics, in 2023, Australian businesses widely use restraint clauses, with 45.3% of businesses using non-disclosure clauses, 25.4% using non-solicitation of clients clauses, and 20.8% using non-compete clauses (1).      

Typical reasons for their inclusion are:

• Protecting confidential information: restraint clauses can help to safeguard sensitive data, trade secrets, and proprietary technologies.
• Maintaining customer relationships: non-solicitation clauses can help to prevent former employees from luring away clients or customers.
• Preserving workforce stability: non-poaching clauses can help to protect a business’s investment in team cohesion and talent.
• Securing Intellectual Property (IP): non-compete clauses can help to prevent employees from using company-developed intellectual property in competing ventures.

Drafting reasonable and enforceable clauses is crucial for employers to achieve these objectives without unfairly restricting employees. Obtaining legal advice from a business lawyer when drafting and reviewing business contracts becomes essential to safeguard both parties. 

Disputes and legal remedies

Restraint clauses are a common source of disputes between employers and employees. Key areas of contention include:

1. Reasonableness: employees often challenge clauses they believe are excessive in scope or duration.
2. Cascading clauses: employers may use cascading clauses with multiple levels of restraint, allowing courts to enforce the most reasonable option. However, these can create uncertainty.
3. Breach allegations: disputes can arise over claims of employees soliciting clients or using confidential information.

Legal recourse options for challenging restraint clauses in employment contracts include:

• Negotiation: parties may try to negotiate a resolution before resorting to litigation.
• Alternative dispute resolution: mediation or arbitration may provide a more efficient solution than Court litigation.
• Court litigation: employees may dispute the enforceability of restraint clauses in court, though this can be costly and uncertain.

Some of the common legal remedies for a breach of a restraint clauses in an employment contract include:

• Injunctions: employers may seek an injunction to prevent former employees from breaching the restraint.
• Damages: courts may award damages or an account of profits for breach of restraint.

Courts are usually hesitant to rewrite restraint clauses, leading employers to use cascading duration and area clauses. These clauses allow courts to apply a broad or narrow interpretation of the restraint, depending on what is considered reasonable. 

For example, a restraint could apply nationwide for 12 months or be limited to a 3-month restraint in a specific area like the Sydney Metropolitan Area. This flexibility helps employers enforce a reasonable restraint, even if one level is found to be unreasonable.

Conclusion

Post-employment restraint clauses are an integral part of Australian employment contracts, designed to protect legitimate business interests while balancing employees’ rights to pursue their careers. 

For employees, understanding these clauses is vital to making informed career decisions and for employers, drafting reasonable and enforceable clauses ensures effective protection without overstepping legal boundaries.

Whether you are an employer or an employee, seeking legal advice on restraint clauses can help you navigate these agreements confidently and avoid potential disputes. If you’re struggling with restrictive clauses or need legal advice in commercial disputes, H+A Legal is ready to assist you, providing expert advice in the business law landscape.