Definition and Types of Restrictive Covenants
Restraints of trade are common clauses found in most senior employee employment contracts. The relevant common law principles applicable to restraints of trade imposed on employees in Australia are that:
- an employer is not entitled to be protected against mere competition, but may constrain the future activities of former employees in order to protect proprietary interests of the employer: see Cactus Imaging Pty Ltd v Glenn Peters [2006] NSWSC 717 (“Cactus Imaging”);
- commonly accepted proprietary interests, the protection of which will justify some measure of restraint of trade, include customer connections, a stable workforce and confidential information;
- at common law, a restraint of trade clause will only be upheld to the extent that it goes no further than is reasonably required to protect such a proprietary interest of the covenantee: see Stacks Taree Pty Ltd v Marshall [2010] NSWSC 77 (“Stacks”) at [39];
- the onus of showing that a contract in restraint of trade is reasonable as between the parties lies on the party alleging that this is so: see Stacks at [41];
- the employer’s proprietary interest in its confidential information may provide a legitimate interest justifying a restraint on competitive activity by the employee on the basis that it is the only practical method of protecting confidential information: see Littlewoods Organisation v Harris [1977] 1 WLR 1472 at 1479; and
- the employer should be able to identify the confidential information with some specificity and not merely in global The requirement for specificity is no less where a contractual obligation is sought to be enforced: see Cactus Imaging.
New South Wales also has particular rules dealing with restraint of trade clauses, in the Restraints of Trade Act 1976 (NSW). Notably, a restraint of trade clause will need to be reasonable, determined by factors such as the period of time and geographical area. Also, invalid restraint of trade clauses can be “read down” by the Supreme Court of New South Wales, if the Court concludes that the clause is against public policy.
Types of Restrictive Covenants
Generally, there are four categories of activities sought to be restrained in post-employment restraint clauses in Australia:
- undertaking / carrying on / being engaged in a business similar to the employer’s business;
- soliciting customers or clients of the employer;
- soliciting employees of the employer; and
- using or disclosing confidential information of the employer (note that courts have upheld significant periods of restraint, where the restraint is specifically designed to protect confidential information rather than protect against competition).
1.Non-compete clauses
An employer is not entitled to protection against mere competition. However, an employer is entitled to protection against the use by the employee of knowledge of the employer’s affairs obtained by virtue of employment. This is so particularly where the information is confidential or where the employer has expended particular time and effort building up the particular knowledge
2.Non-solicitation of customers
Courts will not generally protect an employer against mere competition by a former employee. However, the courts will allow an employer to be protected against unfair competition where the employee has established customer connections as a result of their employment and allow a period of protection following the termination of the employee by the employer.
That said, courts will not uphold a restraint that covers clients that the employee had no connection with or influence over. Also, the fact that a client of a previous employer makes the first approach in requesting services does not mean that “solicitation” has not occurred. While this is the classic position, there has been at least one case, which has held that the concept of soliciting means that the approach must be from the restrained entity and not from the client or customer. Finally, in some circumstances a “no dealing” provision might be permissible.
3.Non-solicitation of employees
Restraint of trade clauses that prevent an employee attempting to recruit former colleagues are often considered reasonable on the basis that the employer has a legitimate interest in maintaining a stable workforce.
In Wilson HTM Investment Group Limited v Pagliaro [2012] NSWSC 1068, Bergin CJ in Eq held that Wilson had “a legitimate commercial interest to protect their business from an exodus of its workforce by reason of competitors stealing a march on it by use of its confidential information”, and accordingly restrained Ord Minnett from using Wilson’s confidential information to approach its employees and entice them to leave their employment.
Enforcement of Restrictive Covenants – Process and Remedies
The courts are willing to enforce appropriate restraint of trade clauses, provided those clauses comply with the common law principles. (In New South Wales, the Restraints of Trade Act 1976 (NSW) makes a restraint valid as long as it is not against public interest, thus making it easier to enforce restraints than it may be in other jurisdictions).
An injunction provides the primary remedy for seeking to enforce a restraint of trade. An injunction may restrain the employee from certain action, which may include taking up employment with a competitor, using particular information of the employer, contacting clients of the employer or performing particular work.
Use and Limitation of Garden Leave
Where the employer gives notice to an employee, but puts the employee on “garden leave” (which involves giving them no work to perform and effectively requiring them to stay at home or perform duties other than their normal duties), wages are paid in the usual manner throughout the notice period and the employment does not end until the expiry of that period.
The advantage of garden leave to an employer is that it removes a potentially damaging employee from the workplace but, unlike regular pay in lieu, prevents the employee from immediately going to work for a competitor because the employment contract remains on foot.
The ability to put an employee on garden leave will, however, need to be provided in the contract of employment (see also “Dismissal with Notice” under “Individual Dismissals” in section VIII. above).
