Restraining future employment – when will it be appropriate to protect the legitimate interest of the employer?

Restraint of trade clauses can be used to limit an ex-employee’s freedom to pass on company information or work for a competitor for a set period of time. It can also restrain the employee from working within a specific geographic area or distance from the company. In most cases, it is an appropriate and reasonable clause, designed to limit damage and loss following termination of employment. An employer who wishes to protect its interests will be looking at non-competition and non-solicitation clauses. The former prevents the old employee from working with a competitor’s company, while the latter prevents them from ‘poaching’ clients to follow them in their new business venture.

Restraint of trade clauses and making them enforceable

Restraint of trade clauses are enforceable when it can be shown that imposing such restrictions is a reasonable protection of legitimate interests held by the company. The ‘reasonable’ assessment ensures that any restrictions on trade do not contradict the Competition and Consumer Act, which enforces regulations on when trade can be limited.

Reasonableness of these clauses

The reasonableness of these clauses was recently addressed in Devil Dog Pty Ltd v Cook [2017] WASC 27. The defendant, Cook, had signed a restraint of trade clause which prevented him from soliciting clients gained through his work with Devil Dog, and which prevented him from working with any competitors within Western Australia for 10 years. When Cook began working for a competitor, Devil Dog Pty Ltd sought an injunction to prevent Cook from continuing to work with the competing company.  The injunction was granted as it was held that the restraint of trade clauses were reasonable. However, it was found that the 10 year limitation was “at the outer edge” of what is reasonable.

The year prior to this, Just Group Limited v Peck [2016] VSCA 334 found against the employer and the restraint clause. Amongst the factors that contributed to it being found unreasonable were the short period of time that the defendant had worked for the company, coupled with the significant amount of business covered by the restraint.

Cascading clauses – do they need to be rethought?

Cascading clauses are used by employers to ensure that at least some degree of restraint is applied to an ex-employee, should a court find that the restraint exceeds the outer edge of reasonableness. The clause is structured to apply a significant restraint as the preferred limit, but in the alternative and if found unreasonable and unenforceable, a lesser amount of time/distance/area can be applied. This can cause some confusion about what the parties have actually agreed to, and the clause may fail for lack of specificity. That said, it does provide an alternate option for the court to consider, as a compromise and to protect both sets of competing interests.

If you would like more information or advice on restraint of trade clauses contact Shavin Silva of our office on 08 8410 9294 or email him at s.silva@pacelawyers.com.