Post Employment Restraints for Employees

A. Introduction

You’ve just been offered that great new job!  Do you take the time to read and understand the employment contract that goes with it or do you just take a “she’ll be right” approach?  The reality is that most employees don’t usually look too hard at a new employment contract and almost never get legal advice before jumping into a new employment relationship.  But what happens six months or a year or more later, when the great new job hasn’t worked out or is wearing a bit thin and you are looking to leave, maybe to work for another employer in the same industry or to start your own business.

Sometimes, you will have a vague memory of something in the employment contract about restraints that you should get looked at.  Alternatively, you won’t bother looking to see if there is any problem in accepting the offer from the new employer.  If you don’t consider the issue of a post employment restraint, you may find yourself in for a rude shock when a lawyer’s letter lands in your hands from your former employer telling you that you cannot work for your new employer for a lengthy period.  Any employment contract should be reviewed thoroughly before you sign it.  If you don’t, then at least you should check the contract before you resign or when your employment otherwise comes to an end.

So what happens if you want to start work for another employer in the same industry as your old employer?  Perhaps some of your old clients phone up and say they want to start doing business with you?  Or maybe you want to set up your own business taking advantage of the knowledge gained in your old job.

B. Types of Restraints

You may be lucky and there won’t be a restraint in your employment contract.  Read on because that may not be the end of it.  An employer will commonly want to ensure that an ex employee does not cause any loss or damage to its business for a reasonable time after termination of the employee’s service.  Restraints generally take 3 main forms:

  1. A restraint from poaching an employee or contractor of the employer;
  2. A restraint from poaching or accepting the business of any customer of the employer with whom the employee had dealings; and
  3. A restraint from misusing confidential information gained during the provision of the service.

The current commonly accepted form of drafting restraint provisions is to allow for several options for periods of restraint which may vary depending on the particular circumstances of a case (sometimes called a “cascading” or “ladder” restraint), ie a contract may specify a number of periods between 1 month and 12 months or more (and sometimes for a range of geographical areas).  Enforcement of a restraint will depend on its reasonableness and the general approach of the courts, in most states, is that if only one period of restraint is specified, and it is unreasonable, then the whole restraint provision will become ineffective.  However, where there are several options, a court can choose the option that best fits the circumstances of a particular case.  It is rare for a restraint period of more than a year to be enforced by a court and it is more common to see periods ranging between 12 months and 3 months.

The main provision of relevance is the provision preventing ex employees from poaching clients.  General restraints (ie ones which prevent an employee from working in the same industry at all) are increasingly unlikely to be enforced by a court and a middle of the road approach would see an anti competition restraint restricted to those clients, potential clients and referrers of work with whom the employee has had dealings in the 12 month period before termination of the employment.  These are effectively those clients who the employee may have some influence with.  This type of restraint may cover any action by an ex employee to persuade, solicit or even accept an unsolicited approach by a relevant client, potential client or referrer.

C. Legal Issues

“Wait on”, you say.  “Surely an employer can’t stop me from working for another employer!”

Well, the starting point is that post employment restraints that effectively prevent a person from earning their livelihood are not in the public interest.  The counter to this however is that people will be held to the contract they have entered into and so it is a question of finding the right balance.

The courts do construe these types of restraints narrowly and only so far as necessary to protect the employer’s reasonable interests.  The courts do not like to restrict a person’s ability to earn a living.  A post-employment restraint will only be enforceable by a court if it is considered reasonable in its scope and for the protection of the employer’s legitimate business interests.    Matters which will be considered by a court in determining whether the restraint is reasonable include:

  1. the geographic area of the restraint, and its length of time;
  2. the types of activities sought to be restrained;
  3. whether the restraint reasonably protects the employer’s legitimate business interests;
  4. whether the restraint is unduly injurious to the interests of the employee and the public; and
  5. whether the employee has been adequately compensated for the restriction period.

Whilst courts are concerned not to hamper a person’s ability to earn their livelihood, the courts have demonstrated that they will protect an employer’s interests where there is clear evidence of breach of reasonable provisions.  It is generally helpful if the employer can demonstrate the extent of harm or potential harm which may be done to their business as a result of the breach.

Generally, restraints on poaching other employees and clients are the easiest to enforce.  Difficulties can arise where an employer wants to stop a former employee from conducting or working in a business in competition to their own.  These restraints often involve a combination of a geographical restriction and a time restriction.  Restraints which have only one combination or which are broadly based are likely to be difficult to enforce.  Courts (in most states) will not substitute what they think to be a reasonable restraint if one is not provided in the contract.  This is why contracts often contain cascading restraints which give a court a variety of combinations of restraint to choose from.  For example, a geographical restraint might be expressed as being for 10, 20, 50, 100, 200 or more kilometres from the employer’s place of business and a time restraint might be expressed as being for 1 month, 2 months, 6 months or 1 year.  Evidence will need to be available about each matter to be proven.  The proper length of the restraint will also depend on evidence as to the length of time during which the former employee might affect the business of the company.

Another issue is likely to be whether the former employee is actually in competition with the former employer or not.  For example, if your old employer operates a business selling cardboard boxes and you start a business selling plastic boxes, the old employer may have problems enforcing the contract.

D. Legal Remedies

So, beyond sending nasty letters, what can an employer do if it thinks you are breaching or about to breach a restraint provision?  To a large extent, this will depend on the quality of the restraint provision in the contract with the employee, the ex employer’s willingness to take legal action to enforce the contract restraint and your ability and determination to defend the ex employer’s claims.

The first step normally taken by an ex employer in enforcing a restraint provision is to contact the former employee in writing or by personal contact alerting them to the existence of the provision and requiring that they cease breaching the contract requirement immediately.  Sometimes this can be enough for a former employee to take fright.  You will have to judge for yourself how serious the ex employer is and if in doubt, this is a good time to get legal advice before the situation deteriorates further as there may be a deal to be done with your old employer.

Generally, the next step will be for your former employer’s lawyers to write to you requiring that you immediately stop breaching the contractual restraint and, for example, that you provide details of any clients with whom you have spoken after ceasing employment with the company, and that you provide written acknowledgement of the terms of the contract (which may be able to be used against you later).  If you haven’t already sought legal advice, this is a good time to do so as your lawyer will be able to give you their experienced opinion of the threats involved.

If these informal approaches are unsuccessful, then the ex employer will need to decide whether to escalate the matter to court or not.  Legal action can take the form of an action for monetary damages for breach of contract and/or an application for an injunction to stop the former employee from continuing to breach their contract.

The normal course is that an ex employer will make an urgent application to the Supreme or District Court for interim restraint orders with a more permanent restraint and a claim of compensation to follow.  Virtually all of these matters are dealt with by way of applications to court for urgent interim orders restraining the former employee from breaching the employment contract pending a final hearing of the matter by the court.

Seeking an injunction from a Court (and defending an application) is a significant legal action.  The process for seeking an injunction is as follows.  An application seeking orders from the Court with suitable supporting affidavit material is prepared and filed in the Supreme Court registry. The former employee needs to be served with a copy of the application and supporting material and given at least two clear days notice of the application.  The employee should file affidavit material responding to the application.

The application is heard by a judge on an interim basis initially, usually on the basis of the filed affidavit material.  There is generally no oral evidence or cross examination on an interim hearing.  The hearing normally lasts a matter of hours and the judge hands down their decision immediately after the hearing or the next day, rather than the weeks or months which can be taken to consider decisions after a full hearing.  The tests applied by the court on hearing an interim injunction are whether there is a serious question to be tried and whether an interim injunction is appropriate on the balance of convenience.

The court does not have the time to deal with the history of the matter in detail and you should seek urgent legal advice and representation if you are served with an application for an injunction.  Most matters of this nature do not proceed past the interim stage.  It is common for the parties to reach an agreement at court prior to the hearing of the matter.  Alternatively, the matter may be heard on an interim basis and orders made by the court pending the full hearing of the matter with full evidence, disclosure of documents, oral evidence and cross examination.  The process of taking a matter to hearing can often take up to 12 months or more and a full hearing normally involves two to three days in court.  Most matters tend to be resolved by agreement prior to that stage.  However, if no agreement is able to be reached, then a decision will need to be made at some point about how far to pursue the matter as defending the proceedings may involve significant expense and emotional commitment from you.

The general rule in the civil courts is that the winning party also obtains an order for costs in their favour.  So, if the ex employer is successful in obtaining interim orders against a former employee, then it is likely that the court will also order that the former employee pay the costs of the application.  Of course, the reverse applies as well.  Court proceedings are expensive for both parties involved and the recoverable costs in the event of obtaining an order against the former employee generally come to between half and two thirds of the actual legal costs.  The recovery of costs is a separate process in itself.

E. Has the employer repudiated the employment contract?

Generally, the employer’s ability to enforce the restraint will not depend on whether you have resigned from your employment or whether your employment has ended due to redundancy.  The restraint will still be enforceable, even if your employment has ended due to redundancy.  However, where your employment has been terminated summarily due to alleged misconduct, the situation may be different.  If the employer has wrongfully terminated the employment agreement (for instance by summarily dismissing an employee for misconduct where that is not objectively justifiable), the employer may not be able to rely on the restraint provision because their actions may amount to repudiation of the contract.

Other conduct by the employer may also amount to repudiation of the contract.  For instance, if the employer unilaterally demotes an employee or arbitrarily changes their remuneration, this may amount to repudiatory conduct by the employer.  The employer may not be able to rely on the restraint if the employee accepts the repudiation and resigns.  IT IS IMPORTANT TO GET LEGAL ADVICE BEFORE RESIGNING IN THESE CIRCUMSTANCES.

F. But wait, that’s not all

Hopefully by now, you will appreciate the importance of checking out the restraint provisions in your employment agreement before you sign it, or at the very least, before you leave an employer.  The restraints most likely to be effective are those that are restricted to clients who you have dealt with and which are for a relatively short period ranging up to 6 months.  A longer period of restraint may be appropriate for a long serving or very senior employee (remembering that the courts will not make up their own restraint periods).

Even if an ex employer does not have a strong case, threats to cease and desist and even legal proceedings can be used tactically to scare an ex employee into submission.  It is also wise to alert your new prospective employer to any restraint with your old employer so they can consider the implications and how far to back you if there is a problem.  It is common for your old employer’s lawyers to write to your new employer advising of the restraint.  If you have not cleared the decks with your new employer, you may find yourself out of a job and with little or no legal remedy open to you.  New employers will generally not want to take on a new employee’s problems and, if they defend any legal proceedings on your behalf, they may potentially be liable if the case is lost.

Even if there is no restraint provision in your contract, most employment contracts will have confidentiality provisions.  Former employers can use these provisions as a back up or substitute for a specific restraint.  The usual claim is that there is a significant threat that you will use confidential information obtained in your old employment in your new employment or business, particularly client details.  It is possible for an injunction to be granted or compensation awarded on this basis, even if there is no specific restraint.  This is one of the reasons you should not email any documents from your work computer to your personal computer or dowload documents to a USB stick before you leave your employment.

There may be things you can do to minimise the prospect of an attack by your former employer.  This may include deferring your starting date with your new employer or working in an uncontroversial area of the business during the restraint period.  Remember that you are under no obligation to advise your old employer of your new work and the longer the time that passes, the less prospect there is of the ex employer taking action.  Of course, the safest step is to go on an overseas holiday for the restraint period or work in a clearly non competitive area.

So, tread carefully where restraints are concerned and get advice sooner rather than later.