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MSI - Employment contractBy Stephen Curtain, Aitken Partners, Lawyers, Melbourne. 

Restraint of trade clauses are commonly found in employment contracts, being used  to protect the employer’s business interests. In this article we look at how they can affect you and your future business dealings.

Restraint of Trade

The large majority of employment contracts for senior employees contain restraint clauses on the employees. However most parties, employers and employees, enter into these restraints without any certainty as to the extent to which the proposed restraints are enforceable, if at all.

Restraint of trade clauses are considered to be void as against public policy unless the employer can demonstrate that the clause in question is a reasonable one and that it provides no more than adequate protection of the employer’s legitimate business interests, otherwise it will be unenforceable.

Legitimate business interest

The employer must be able to prove that the restraint provides protection for its legitimate business interest. Identifying whether something is a legitimate business interest is complicated by the fact that the issue of whether such an interest exists is determined as at the date the employment contract is entered into and not when the employment terminates and when it would be easier to assess the situation into the immediate future.

Legitimate business interests which are capable of protection include the employer’s relationship with its customers provided the relationship between the employee and the customer is such that the employee has a special connection with the customer as the face of the employer and has some material control over the employer’s business with the customer as a consequence.

Courts have also held that an employer such as a labour hire firm has a legitimate interest in protecting the relationship between the labour it provides and the customer to whom it provides the labour so that employers can protect themselves from customers engaging such employees with appropriate restraint clauses in employment contracts.

Reasonableness

Courts will only uphold restraint clauses that are no more than is reasonable to provide the employer with protection and any restraint that goes beyond that will be void although, in New South Wales, there is scope in certain circumstances for Courts to render clauses reasonable without using the blue pencil rule applied in other jurisdictions in Australia.

One way of measuring the reasonableness of a restraint is to consider how long it would take a reasonably competent replacement employee to establish a relationship with the client so as to replace the former employees influence or to ask how long the employees hold over the client is expected to last before weakening.

It is important too, not to make the restraint so wide so as to encompass areas in which the employee was not engaged when employed with the employer. Thus, if an accountant was only engaged in insolvency when employed, the employer would have difficulty enforcing a post-employment restraint which precluded him from practising in audit.

Importantly, it is critical not to fall in the trap of making the restraint too wide geographically or too long in time. It is better to fix a time that is shorter which will have a stronger degree of being upheld than having a longer period of time which is uncertain and enforceable only after expending considerable sums in legal costs. The same applies to geographical limits. Employers often seek to protect themselves by using cascading clauses but there is a risk in doing so in that Courts have found sub-clauses to be unenforceable because there is no certainty as to the extent of the restraint.

Cases

Two Victorian cases highlight the difficulties associated with not only the interpretation of restraint clauses but also their drafting.

Birdanco Nominees Pty Ltd v Money [2012] VSCA 64

In this matter, Liam Money was a junior trainee accountant working for Bird Cameron.  Mr Money’s employment contract contained a post-termination restraint clause prohibiting him from providing certain services to any client of Bird Cameron for whom he had provided services during the final three years of his employment with the firm. If Mr Money breached the restraint he would be liable to pay Bird Cameron a sum equal to 75% of the fees it earned from the client in the last financial year in which it remained a client of the firm. The restraint which operated for a period of three years after his employment ceased was upheld by the Victorian Court of Appeal, notwithstanding the breadth of services he was precluded from providing was “the practice of chartered accountants, taxation agents, business advisors and activities related nature.”

In coming to its conclusion the Court determined that Bird Cameron had the requisite legitimate business interest to protect in the connection between Money and whom he dealt directly during his employment with Bird Cameron. It also considered the restraint to be reasonable both as to its duration and its limitations because it was confined to those clients of Bird Cameron with whom Money had dealt with and established a continuing relationship and did not stop him from acting in direct competition with Bird Cameron.

Wallis Nominees (Computing) Pty Ltd v Pickett [2012] VSC 82

In this case heard in the Victorian Supreme Court, Wallis Nominees (Computing), a software consultancy business had employed Pickett as a software consultant who was contracted out to clients in various IT roles. During his employment with Wallis, Pickett was contracted to Grocon on a full time basis. He then resigned from his position at Wallis to take up a position with Grocon as a consultant on a full-time basis. His employment contract with Wallis contained a 12 month post-employment restraint precluding him from providing services to any of its customers to whom it provided certain services.

The Court held that Wallis did not have any legitimate business interest to protect with a restrictive covenant as Pickett was not intended to be the face of Wallis nor was his role such that Wallis developed goodwill around him so that he could exercise control over the customer in question. The Court found that a strong connection with the client had to be established to constitute a legitimate business interest and this would include personal or special knowledge of the client and a significant degree of influence.

The Court held that in any event the covenant went further than was acceptable in that it prohibited Pickett from providing services to clients of Wallis to whom he had not actually provided services (as a result of which he could not therefore establish the requisite close connection) and furthermore the duration of the restraint at 12 months was unreasonable because it wouldn’t take Wallis that long to replace Pickett with someone to establish the relationship with the client.

In a third case heard in the Federal Court a restraint of 2 years was held to be acceptable for a former director and senior executive of HRX, a HR outsourcing company. The former director, Brett Pearson, was co-founder of the company and had formed a key role in HRX’s business in providing recruitment solutions. Mr Pearson was also the “human face” of HRX in its dealings with customers and was integral in pursuing new business. The restraint was enforced when he resigned to take up a position with a competitor.– see HRX Holdings Pty Ltd v Pearson (2012) FCA 161.

Accordingly employers should be careful in drawing such clauses and avoid using template clauses as each aspect of the restraint will be considered against the prevailing circumstances in determining whether a restraint will be upheld. And it is wise to remember that a limited restraint is usually better than no restraint at all.

For more information on restraint of trade clauses in your employment contracts or simply want to know your options, we recommend you seek professional advice.

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