We will now look at the different types of post-employment restrictive covenants, and work through a checklist of questions employers should ask themselves when drafting a restraint to make sure it’s the right fit.
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A good restraint is not about creating the ultimate “catch all” provision. Rather, it requires a series of good choices to be made that protect the most important business assets. Whilst Australian and English courts have on occasion upheld “cascading” restraints (which might, for example, operate for 12, 9 or 6 months, whichever time period a court finds is enforceable) in practice, cascading restraints can lead to business uncertainty. This is because it is not clear when the employee leaves which time period will be enforceable.
Think commercially first and about the legalities second
The starting point is to ask, what is the restraint trying to protect? These are the assets of the business that would be most vulnerable if a particular employee left. In order for a restraint to be enforceable, it must be reasonable to protect a legitimate business interest. Australian courts have recognised that an employer’s trade secrets, confidential information, customer or client connections, and staff connections are all protectable interests that are capable of supporting a restraint.
What legal tools can you use?
The next question is, what is the most effective way to protect the identified interest? This is about choosing a restraint that is targeted because the wider the restraint, the less likely it is that a court will consider it reasonable to protect this interest. Broadly, there are four different types of restraint that can be used either as a stand-alone provision, or in combination.
A pure non-compete restraint is the most difficult to enforce because it prevents an employee from working for a competitor of the former employer in any capacity.
An employer can increase the likelihood that a non-compete restraint will be enforceable if they can show it was the subject of specific negotiation (either at the time the employment contract was entered into, or during the employment), or it is accompanied by provisions for payment tied to the period of the restraint to minimise financial disadvantage to the employee whilst he or she is out of the employment market.
A non-compete restraint can be used where other forms of protection would be inadequate to protect the employer’s interest. This may occur where an employee possesses specific confidential information obtained during the course of their employment, or more commonly where they acted as the face of the business and the custodian of key client relationships. The courts have recognised that a standard confidentiality clause or non-solicitation restraint may not provide adequate practical protection in these circumstances.
A non-solicitation restraint is designed to protect customer connections or the goodwill of the business by preventing an employee from enticing away customers or clients of their former employer. As a rule, a non-solicitation restraint should be restricted to customers or clients with whom the employee had a meaningful relationship, or provided services on a continuing basis. This is because a restraint which applies to all customers or clients of the business, including those with whom the employee had no contact, is likely to go beyond what is reasonably necessary to protect the employer’s interest.
A non-dealing restraint prevents an employee from accepting instructions or business from former clients where it is the client who makes the approach or initiates contact. This type of restraint has its advantages, including that it overcomes the problem of proving actual solicitation by a former employee – often a contentious point in litigation.
As the name suggests, a non-poaching restraint prevents an employee from poaching other employees of their former employer. Employers should discriminate between employees who are critical to their business and those who are not, and draft the restraint so that it applies to this specific class. The case law shows that a restraint on employment that casts the net too wide and prohibits the solicitation of any employee right down to the “tea lady” is unlikely to be enforceable.
Finally, employers should test the restraint by looking for, and addressing any areas of potential vulnerability. These are the points of attack an opponent might raise if the enforceability of the restraint is ever tested in court. For example, providing an employee with an explanation of the restraint and the reasons for it, and giving him or her the opportunity to obtain legal advice before committing to the restraint, feature in a number of cases where a restraint was upheld (see the “success factors” in our map above).
Updating the restraint
Like any piece of valuable equipment, a restraint needs to be routinely maintained. Where an employee changes position, or the business diversifies its services or product lines or takes on particularly important clients, the restraint should be updated. This could be done, for example, by way of a contract refresh tied to the annual pay review or promotion cycle.
Putting in place a system to administer effective restraint provisions will ensure that you have a targeted restraint in place at the time you need it most, when business assets are at risk.