4 key lessons in drafting solid post-employment restraints

It is important to properly consider what risks your senior or client facing employees pose to the business, in drafting appropriate post-employment restraints

It is important to properly consider what risks your senior or client facing employees pose to the business, before deciding how best to address those risks in carefully drafted employment contracts – with appropriate post-employment restraints, writes Gordon Williams

It’s rare for cases about post-employment restraints to grab headlines, but that’s exactly what happened (at least in the legal press) a couple of weeks ago when a Western Australian Judge decided there was a prima facie case for saying a 10-year non-compete restraint was enforceable.

This decision will come as a surprise to many, especially as 12 months is often considered the upper end of what’s reasonable.

Of course, this is just an interim decision and there were also particular factors at play, including that the employee had sold the business to the new owner.

Whether a post-employment restraint is ultimately enforced will turn on the particular facts of each case. As a starting point, post-employment restraints will only be enforced if the employer can show they are reasonable and go no further than necessary to protect the employer’s legitimate business interest (such as confidential information, customer or client connection and a stable workforce).

To prove these things, an employer must present very convincing evidence. Of course, they need to resist the temptation to overstate the risk to the business. A good example of this was highlighted in a recent case where the Court decided that Just Group Ltd’s concerns about confidential information could not justify a 24-month non-compete restraint against its CFO (who had resigned to join a rival fashion retailer).

Drafting post-employment restraints
Obviously, the drafting of your post-employment restraints is crucial – they should be targeted to the particular role and business interests that need protecting and include an appropriate (and not excessive) restraint period and geographic area.

Employers need to think about this when they recruit an employee and also when an employee is moved to a new role or promoted. For example, does the new role justify different restraints, should they apply for a longer period or over a different geographic area? Or what if the original contract had no restraints?

When it comes to enforcement, there are also some common misconceptions. The ones I hear employees most commonly ask are:

  • “Surely I can’t be prevented from earning a living.” Yes, they can – non-compete restraints are often enforced as was recently demonstrated when DP World obtained a three-month injunction preventing one of its terminal managers from starting work with a competitor (this was on top of the employee’s three-month garden leave period).
  • “You have to pay me during the non-compete restraint period.” Not at all – the Courts routinely enforce non-compete restraints when an employee is not being paid. That said, payment during the restraint period may help convince a Judge to grant an injunction.
  • “You can’t enforce a restraint where I’ve been made redundant.” Yes, you can, provided you are still operating the business – although it would probably be different if you’ve closed the business down.

Other important considerations: post-employment restraints
There are also some other important issues to keep in mind. Uniquely, in New South Wales, Courts have the power to modify the written terms of a restraint to make it enforceable (eg, to reduce the restraint period from 12 to nine months or limit its scope to cover only customers with whom the employee dealt). As a result, where there is an ability to choose the governing law of the employment contract, New South Wales is usually the obvious choice.

In other States, the position is very different. Courts can only rescue a restraint that is too broadly drafted if it can delete the offending words and leave behind an enforceable restraint. For this reason, it is usually advisable to use cascading or ladder restraints for employees who work outside of New South Wales. For example, your restraints would operate for each of nine, six and three months – giving the Court the ability to strike out the nine or six-month option but enforce the restraint for three months.

Of course, enforcing post-employment restraints by way of injunction is always a challenge. An interesting recent development in this area is the increased use of liquated damages clauses to support restraints. For example, in one case, an accountant was subject to a three-year restraint covenant preventing him from soliciting, or performing services for, clients of his former employer. That restraint was held to be valid.

In addition, the accountant’s solicitation of a client triggered a payment under a liquated damages clause in his employment contract – equal to 75 per cent of the fees his former employer had received from that client in the previous financial year.

Another case saw an employer recovering significant liquidated damages when its employee resigned before the end of a fixed-term contract.

All these recent examples confirm just how important it is to properly consider what risks your senior or client facing employees pose to the business before deciding how best to address those risks in carefully drafted employment contracts.

4 key lessons for HR in post-employment restraints

  • The Courts are willing to enforce non-compete restraints preventing an employee working for a competitor – even if that stops them earning a living
  • However, employers must be able to produce evidence that a post-employment restraint is necessary to protect its business – and the terms are reasonable
  • Restraints need to be targeted to the employee’s role and the risks posed – and you need to think about this when employees are recruited as well as promoted
  • There’s no substitute for good drafting – the business will thank you in the long run

Image source: iStock