The Legal Landscape of Post-Employment Restraints

Understanding Restraint of Trade Clauses

Restraint of trade clauses in employment agreements limit an employee’s ability to perform certain activities, such as soliciting clients, poaching staff or competing with a former employer.

Not all restraints are created equal.

At common law, the starting presumption is that restraints of trade are unenforceable as they are considered to be contrary to public policy. Enforceability is limited to what is reasonable to protect legitimate business interests. This includes things like protecting customer connections and confidential information.

With the right circumstances and drafting, clauses can withstand a Court’s scrutiny.

Types of Restraints

There are several types of restraints commonly found in employment agreements. They include:

• Non-compete clauses: these clauses seek to prevent an employee from working for another employer in the same field (i.e. a competitor).
• Non-solicitation of clients clauses: some workers will establish strong connections with clients. These clauses seek to prohibit a former employees from relying on their connections to 'poach' clients.
• Non-solicitation of workers clauses: these clauses seek to prohibit a former employee from soliciting staff or contractors to maintain a stable workforce.

It is common for post-employment restraints to be drafted in a ‘cascading’ style. This may vary the geographic area, duration or activities affected. The idea being that a restraint that is too wide could still be severed, leaving what remains enforceable.

Enforceability Challenge

Employers face difficulties if relying on clauses that are too wide or unreasonable.

At common law, the starting position is that restraints of trade are presumed void and contrary to public policy. However, that presumption can be rebutted.  The employer must establish that the restriction is no broader than is reasonably necessary to protect a legitimate interest, having regard to the surrounding circumstances.

A much stricter view is taken of restraint of trade terms in employment contracts than similar terms in commercial agreements.

Nevertheless, it is well established that an employer can still have interests capable of protection by a restraint covenant. Examples of these interests include protecting customer relationships, protecting trade secrets and maintaining a stable workforce.

Courts are more likely to uphold a restraint clause that is limited to protect legitimate interests. For example, a senior employee with access to highly sensitive information is more likely to have post-employment restraints deemed enforceable than a lower-level employee without this access.

In the absence of a valid post-employment restraint or other restrictions at law, a business cannot prevent a former employee from contacting its clients or setting up a competing business across the street. The Courts will not protect against ‘mere competition’.

Enforcement often starts with the business reminding the employee of their obligations, through a letter of demand or other steps. In some cases, it will be necessary to commence proceedings and seek an urgent interlocutory injunction.

Acting swiftly and strategically is key.

Recent Case: AEI v Martin

The recent decision of AEI Insurance Group Pty Ltd v Martin (No 4) [2024] FCA 1110 demonstrates how post-employment restraints can provide protection.

AEI Insurance Group, an insurance broker business, sought to enforce a non-solicitation clause against former Account Manager, Mr Martin.

Mr Martin had been employed by AEI for around 11 years. During that time, he developed close relationships with clients and became the face of AEI’s business in the Queensland market. He resigned to work for a competitor.

In the days following his resignation, Mr Martin sent a text message to a number of clients, family and friends providing them with his new phone number. 45 clients ultimately transferred to that competitor.

At trial, and following interlocutory proceedings, Justice Thawley held a 12 month non-solicitation restraint was a reasonable period to allow AEI to re-establish its client connections. The restraint had been breached. Further, Mr Martin had taken steps to hide evidence.

AEI was awarded damages of $500,000. This was the estimated loss suffered over a 12 month period.

A costly breach indeed.

Practical Tips

There are many practical steps businesses can take to protect their interests. These may include:

• Getting the drafting right: It is essential to have tailored, reasonable restraints that align with the specific business interests being protected. Be wary of pro-forma terms. As the saying goes ‘they may not be worth the paper they’re written on’.
• Departing employees: Remind departing employees of their ongoing obligations to the business. If you suspect something may be amiss, check in with clients, check the departing employee’s work systems for items sent to a personal email, look for suspicious downloads etc.
• Gardening leave: Consider placing an employee on ‘gardening leave’ for their notice period. During this period, they will continue to owe obligations to the company as an employee, including not acting in conflict with the business’s interests.
• Act quickly: Act promptly if a breach is suspected. Delayed action could impact the prospects of obtaining an interlocutory injunction.
• Look out for change: There is ongoing Government attention on non-compete clauses, in light of concerns that their use is impacting job mobility and wage growth. Businesses relying on non-compete clauses would be wise to keep a lookout for regulatory change.

‍This article in no way constitutes legal advice. It is general in nature and is the opinion of the author only. You should seek legal advice tailored to your individual circumstances before acting on anything related to this article.