Post employment restraints

A. Introduction

There will be times when an employee leaves your company and you find out later that:

  1. several significant clients have left you and have followed this employee into their new business or employment; or
  2. the employee has established their own business in competition with your business nearby; or
  3. the employee has approached other employees of your own companies in an attempt to get them to leave and accompany him/her in their new business.

What can you as an employer do about these situations? To a large extent, what you can do will depend on the quality of the restraint provision in the contract with the employee, your willingness to take legal action to enforce the contract restraint and the determination of your former employee.

B. Legal issues

The courts 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; and
  4. whether the restraint is unduly injurious to the interests of the employee and the public.

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 will not substitute what they think to be a reasonable restraint if one is not provided in the contract. This has given rise to what is called a “cascading provision”. This is a provision which gives 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. For example, 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 your business or not. For example, if you operate a business selling cardboard boxes and the former employee starts a business selling plastic boxes, there may be difficulties in obtaining an injunction.

Finally, employers should note that they may not be able to enforce the restraint provision if they have engaged in conduct amounting to repudiation of contract, and this has been accepted by the employee.  For instance, where an employee has been terminated summarily due to alleged misconduct and a court finds the summary termination was wrongful, 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.

C. Injunction process

The first step 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 may be enough of itself. If you are satisfied that the employee is intentionally breaching their contract provisions, then it is time to involve your lawyers.

Generally, the next step will be for your lawyers to write to the former employee requiring that they immediately stop breaching their contract provision and provide details of any clients with whom they have spoken after ceasing their employment with your company, for example and requiring written acknowledgement of the terms of their contract.

If these informal approaches are unsuccessful, then you 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 or an application for an injunction to stop the former employee from continuing to breach their contract. 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.

The process for seeking an injunction is as follows. An application seeking orders from the Supreme or District Court with suitable supporting affidavit material will need to be prepared and filed in the Court registry. A filing fee is payable on the application. 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 application is heard by a judge on an interim basis initially, solely 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 is an interim injunction appropriate on the balance of convenience. The prospects of success of an application will largely depend on the quality of the evidence which can be presented to the court so all efforts need to be made to secure evidence of the breach by the employee.

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.

The general rule in the civil courts is that the winning party also obtains an order for costs in their favour. So, if you are successful in obtaining interim orders against the former employee, then it is likely that the court will also order that the former employee pay your 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. If the losing employee was not prepared to pay voluntarily, then the processes of enforcement would have to be used, namely enforcement of a warrant of possession by a court bailiff, the garnishee of any wages payable to the former employee, an enforcement hearing whereby the employee is required to answer questions about their financial situation and ability to pay the debt and ultimately, bankruptcy.