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23 August 2017

Don’t miss out on that dream job – Restraint clauses in employment contracts

David Rosen

Senior Associate

Kate was employed as a graduate accountant in a local Hobart firm.  After two years in the role, Kate was head hunted by a rival national accounting firm to go and work in the firm’s Melbourne office.  Kate was excited by both the professional opportunities that the new role offered as well as an opportunity to move to Melbourne.

At the time of commencing the graduate role with the Hobart firm, Kate had signed an employment contract and at the time of doing so, Kate, like most young employees starting their first job was really only concerned as to how much she was going to get paid and any other benefits that came with the job.  Kate had noticed that her employment contract had contained a “restraint clause” but she was just excited at being offered a role at a really good company and had not really thought too much about the restraint clause.

Part of the reason that the Melbourne firm was so keen to get Kate on board was that during her time in the Hobart office, she had developed a really good working relationship with a local Hobart client. The local Hobart client also had an office in Melbourne and it was the intention of Kate’s new employer that Kate would use her Hobart contacts to try to obtain new work from the Melbourne based office.

Kate had let some of her work colleagues know about her new role in Melbourne and how she was going to be working with an existing client of the Hobart firm.  After having handed in her notice, Kate was asked to meet with the HR Manager and the Managing Director and during the meeting, Kate was sternly reminded of her obligations pursuant to the “restraint clause” in her employment contract. The restraint would prevent Kate from working with the Hobart client in her new role in Melbourne for a period of 12 months.  Her employer had made it clear to Kate that whilst they did not want to do so, for commercial reasons, if she was found to be undertaking work for the client in her new role in Melbourne, the firm would consider taking legal action against her and would be seeking an injunction stopping her from working with this client.

Kate was of course very distressed and was left with no choice but to report this to her new employer.  Thankfully, the parties were able to reach an agreement but it was a very stressful time for Kate and it was not a great start for her in her new dream job.

At the commencement of new employee’s employment, most employers will seek to have new employees enter into an employment contract.  A lot of employment contracts will contain “restraint clauses”.  Before an employee signs an employment contract, it is of course very important to ensure that they have carefully read all of the terms and conditions referred to in their employment contract.

The idea behind a restraint clause in an employment contract is to essentially protect the employer’s commercial interests.

Restraint clauses will normally be drafted on the basis of seeking to prevent and to restrain a former employee from one or all of the following:

  1. Working for a competitor in the same field and type of work;
  2. Setting up their own competing business;
  3. Poaching clients from their former employer;
  4. Poaching their former work colleagues to leave their employment;
  5. Accepting work from former clients; and/or
  6. Using the former employer’s suppliers.

A restraint clause will normally refer to both a geographical area and also to a time frame.  For example, the clause may refer to an employee not being allowed to work in the Hobart area for a competitor for a period of 12 months.

Some employment contracts will have what is called a “cascading restraint clause” which will refer to different levels of restraint.  For example, the clause may refer to the restraint period as being 12 months or 6 months or 3 months.  In such a case, the employer would likely be seeking to enforce the restraint clause for a period of 12 months but if the Court was to deem a period of 12 months as being too harsh, then in such circumstances, the employer would be seeking to have the Court enforce the restraint clause for the period of either 6 or 3 months.

If an employer wanted to take legal action against a former employee for a breach of a restraint clause, the likely remedy that the employer would be seeking from the Court would be an injunction.  In such circumstances, the employer may be asking the Court to make an order that the former employee is stopped from undertaking any activities that were in breach of the restraint clause.  This may include for example, an injunction whereby the former employer was stopped from working for a period of 6 months with their new employer.

As with all legal matters, any restraint clause dispute that ended up before the Court would be determined on its merits.

One of the key factors that the Court will be seeking to consider and to determine in any restraint clause dispute would be whether or not the restraint clause is reasonable.  For example, the Court would likely deem that it was not reasonable that a restraint clause referred to a restraint period of 2 years and that covered all occupations other than the one that the former employee was employed in.

During their employment, an employee should review and refresh themselves as to the terms of their employment contract and especially so if they are considering moving on and applying for other roles.

As with the drafting of any legal document, it is also of course very important that employers also take very careful care when drafting employment contracts to ensure that the commercial interests of their business is protected. Employers should also take care to ensure that the restraint clause is drafted in such a way that they are upheld in the event that it becomes necessary to have the Court enforce the clause.

If you have any questions about this issue or any other employment issues, please do not hesitate to contact our office to speak with our employment lawyer, David Rosen.

 

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