Definition and 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 competition).
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.
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 for which 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.
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, 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.