You web browser may not be properly supported. To use this site and all its features we recommend using the latest versions of Chrome, Safari or Firefox

Meeting

One of the things that keep business owners awake at night is the prospect of employees leaving and starting up a rival business (or joining a competitor) and potentially taking hard-won customers with them.

The best protection for an employer is to include a restraint of trade clause in their employment contract.

It is important for business owners to regularly review the efficacy of their restraint clauses. This is particularly relevant where there has been a change in the nature of the business because the critical date for assessing the reasonableness of the restraint of trade clause is the date that the employment agreement was made.

Traditionally, courts do not like to impose a restraint upon an employee’s ability to earn a living or to restrict competition. Nonetheless, time and time again Courts have upheld restraint clauses and found in favour of employers.

The ability to restrain former employees is contingent upon the efficacy of the restraint of trade clauses. As a general rule, restraint of trade provisions are void. However, the law allows the use of restraint clauses where it can be proven that there were “special circumstances” which made it necessary to protect the interests of the parties. In assessing what type of protection will be regarded as reasonable, an employer must identify a relevant risk such as the risk of the loss of business to a competitor by the use of a personal connection with clients and information about those clients.

The onus of proving special circumstances is on the employer. The clause must not impose more than adequate protection and if it goes beyond this then it will be considered unreasonable.

The relevant factors are:

  • The nature of the business and whether confidential information was obtained that was specialised knowledge not ordinarily obtained in the course of employment;
  • A comparison between the former and current positions of the employee within each company;
  • The composition and value of the of the client/customer base, and
  • The length of the restraint provision and its reasonableness.

Fearing the loss of clientele is not enough to make an application to the court. A clause can be struck down if it is too wide (for example, prohibits employment throughout the whole of the state of Victoria) or you cannot prove that it is designed to protect some legitimate interest such as intellectual property or a unique business product.

A "legitimate interest" is the value of any relationships the employee develops with clients during the course of employment-such relationships are beneficial to the employer and the benefit is treated as an interest which justifies some reasonable protection upon the cessation of employment. Employers should ensure that the clause is legitimate to protect the company’s interest. If the employee leaves, what position will they be undertaking and what exposure to your clients might they have?

The position may be similar but different in scope and the target market may be different. In one case an employer was unsuccessful because the employee’s new role was deemed different to the services offered by the former employer. The court found that because only 30 % of the old role was being performed in the new role, the employer had failed to identify a legitimate interest that required protection by the clause and was deemed to have gone further than was reasonably necessary to protect its interests.

However, in another case, an employee’s close and intimate knowledge of management and clients resulted in a two year restraint clause being enforced. Even a close connection with the customer may not be sufficient, what is needed is a strong connection including personal or special knowledge “client connection” (which may include confidential information of the client and a significant degree of influence).

Employees who work in business development roles where they develop a personal relationship with the client and acquire knowledge and understanding of client’s affairs need to carefully consider the impact of restraint of trade clauses on their future career moves, as employers are entitled to impose restraints on such employees, particularly in professional services firms.

The contents of this blog post are considered accurate as at the date of publication. However the applicable laws may be subject to change, thereby affecting the accuracy of the article. The information contained in this blog post is of a general nature only and is not specific to anyone’s personal circumstances. Please seek legal advice before acting on any of the information contained in this post.

Thank you for your feedback.

Related blog posts

Consumer and the Law
Liar loans: how mortgage brokers are putting clients at risk

The term ‘liar loans’ has been coined on the back of the Banking Royal Commission. This is because studies have shown almost 40 per cent of loan applications completed through mortgage brokers contained at least one factually incorrect statement. Whether mortgage brokers are providing lenders with incorrect information, or information that is out-of-date, they are putting themselves – and their clients – at risk. A recent study conducted by the Consumer Credit Legal Centre in New South Wales identified some mortgage brokers were breaking the law when filling out loan applications for their clients. Common examples included brokers suggesting their clients provide a different answer...

Planning desk close up documentresize
Consumer and the Law
How to lodge a complaint with Australian Financial Complaints Authority

The Australian Financial Complaints Authority (AFCA) acts as the middleperson between financial firms and consumers or small businesses, offering free and independent dispute resolution services. It deals with complaints about financial advice, insurance, banking and superannuation products and services. While the time limit to lodge a complaint to AFCA is usually between two and six years, the Australian Government recently created the opportunity for those with complaints up to 10 years old to come forward. This means consumers and small businesses have until 30 June 2020 to lodge complaints dating back to 1 January 2008. To lodge a complaint, you must follow AFCA’s process. It is...

How to lodge a complaint with Australian Financial Complaints Authority
Business Law
Proposed Changes to the Franchising Code of Conduct

Franchising is big business in Australia, with approximately 1,120 franchise systems and 79,000 franchise units operating nationally1. As franchising is a diverse sector with characteristics that are unique from other business models, franchises are governed by a mandatory Franchising Code of Conduct (Franchising Code).2 The Parliamentary Joint Committee on Corporations and Financial Services recently completed an inquiry into the operation and effectiveness of the Franchising Code and has released the Fairness in Franchising Report (Report).3 Some of the key findings and recommendations of the report are discussed below. The Committee recommends that the Australian Government establish an...

Waitress In Black Apron Upload

We're here to help

Start your online claim check now. Or, if you have a question, get in touch with our team.