Given difficult economic times, protection of confidential information (including trade secrets) has become a greater priority for business in Australia. As a result, post-employment restraint litigation is increasingly common as employers attempt to protect their confidential information and restrain former employees from soliciting the business of their valued clients.

This note outlines the position in Australia regarding the legal enforceability of post-employment restrictions on conduct.

POST-EMPLOYMENT RESTRAINTS

Content

It is common in Australia for contracts of employment with executives and other key employees to contain terms restricting the activities of employees after the employment relationship ends, including prohibitions against: 

  • competition;
  • solicitation of clients, customers or suppliers; and
  • solicitation of employees or other workers.

The restraints are almost always limited to a defined restricted activity, a time period and an area of operation. These operational limitations are important when considering whether the restraints are legally enforceable.

‘Garden leave’ clauses, which allow an employer to instruct an employee serving their notice period to not attend work, are increasingly being viewed by courts as being equivalent to post-employment restraints.

Are restraints enforceable?

In Australia, post-employment restraints are generally unenforceable for public policy reasons unless they are reasonably necessary to protect the employer’s (or principal’s) legitimate business interests (usually confidential information or goodwill with customers or employees). There are two elements to be satisfied: firstly, the employer must have a legitimate interest in imposing the restraint and secondly, the scope of the restraint must be no wider than is reasonable necessary to protect that interest.

Legitimate business interests

Stifling competition from a former employee or preventing a valuable worker from being employed by someone else is not a legitimate interest. Recognised categories of legitimate interest include confidential information and customer or employee connections.

Reasonableness

In assessing the reasonableness of a restraint, a court will consider various factors including: 

  • types of activities restrained;
  • duration of restraint;
  • geographic coverage of restraint;
  • seniority and role of employee; and
  • whether consideration is provided in exchange for the restraint and, if so, the level of consideration.

Seniority and role of the employee are an important consideration when considering enforceability as they determine whether the employee:

  • had access to confidential information of the employer and/or customers;
  • were ‘customer facing’ and involved in building customer relationships; and
  • were the ‘human face’ of the business.

Enforceability of a restraint is determined at the time the restraint was agreed to (that is, in most cases, the time the employment contract was entered into).

Drafting restraints

Given the difficulty in determining whether a restraint will be found to be enforceable, ‘cascading clauses’ are often used to provide the court with a variety of options for the scope of the restrained activities, the period and the geographical coverage. Courts have a common law  power to delete the options so that the resulting clause is reasonable and enforceable (the ‘blue pencil test’).

In New South Wales, legislation empowers the Supreme Court of New South Wales to read down otherwise invalid restraints. This power is much broader than the common law power to simply sever certain options and can generally be relied on to obtain at least partial enforcement of a restraint in New South Wales.

Enforcement

The usual remedy sought by an employer when enforcing a post-employment restraint is an injunction, that is, an order of the Court restraining the employees from performing particular activities. The employer may also seek damages for any loss caused by a breach of the restraint.

With international offices in London, Shanghai, Melbourne, and Sydney, Seyfarth Shaw’s trade secrets, computer fraud, and non-competes practice group provides national and international coverage for companies seeking to protect their information assets, including trade secrets and confidential information, and key business relationships.  For more information on international trade secret and non-compete issues, please see our previous webinars When Trade Secrets Cross International Borders and Trade Secret and Non-Compete Considerations In Asia. We are pleased to announce that we will have  another international trade secrets and non-compete law update later this year with an Australia and EU focus.