Post-employment restraints of trade are enforceable

Post-employment restraints of trade are enforceable

Well-drafted restraint of trade clauses in employment agreements are the only way employers can prevent former staff poaching their clients and staff.

However, in drafting such clauses employers should consider how the restraint legislation varies from state to state, understand what the courts will consider "reasonable", ensure employees understand the effect of such clauses, and how cascading clauses may (in some instances) provide an advantage should a court find other clauses to be unreasonable.

Understand what is meant by the term "reasonable"

In determining whether a clause is "reasonable" the court will consider each clause of the restraint on a case-by-case basis.

The courts will have particular regard to:

  • what was reasonable when the restraint was entered into by the employee
  • the period of the restraint: the courts are concerned to ensure that the period of the restraint is no longer than is reasonably necessary to protect the value of confidential information or client and staff contacts
  • the geographical limit of trade clause: the courts are unlikely to enforce a restraint that is geographically wider than the legitimate business interest that the clause is trying to protect
  • the extent of the restraint of trade clause: the courts will consider the activities that an employer/partner is trying to prevent an employee from engaging in. Restrictions are only likely to be enforced to the extent that they go to protecting legitimate business interests, and do not extend beyond what is necessary to protect those interests

It will be difficult for a clause to protect a legitimate business interest if it cannot be defined. This means that rather than allowing for generic or standard restraint clauses in agreements, deeds or agreements, employers should exercise real care when instructing their lawyers in the drafting of these clauses if they are to have any prospect of being enforced at a later time.

In a recent case example, a 9-month post-employment restraint of trade was found to be reasonable to protect the plaintiff’s confidential information after two2 senior employees breached agreementual and fiduciary duties by going to work for a competitor in the HR software market.

The defendants, Mr McMurchy and Mr Kumaran, both left their employment with the plaintiff, Employsure Pty Ltd, to work for the second defendant, ELMO Software Ltd. The plaintiff and the second defendant are competitor businesses who both provide HR software for employers. Mr McMurchy was a manager involved with new software being launched in Australia and New Zealand. Mr Kumaran was a senior salesperson.

The plaintiff applied to the Supreme Court of New South Wales to enforce post-employment restraints and for injunctive relief to prevent the employees using its confidential information.

Mr McMurchy — breach of contractual and fiduciary duties and restraint enforceable

The Supreme Court found that giving only four weeks’ notice when his employment agreement required 3 months’ notice was not effective to terminate Mr McMurchy’s employment agreement. Given the notice was provided in January 2021, this brought the agreement to an end three months later, in April 2021.

Mr McMurchy was accordingly in breach of his agreement with the plaintiff by taking up employment with the second defendant in January 2021. He had contractual and fiduciary obligations he breached by accepting employment with the second defendant, including to avoid a conflict with his loyalty to the plaintiff.

The court also found a nine-month post-employment restraint from when the plaintiff gave Mr McMurchy notice of termination was reasonable. The court found that, despite some differences, the two employers had similar products aimed at the same or similar markets such that they were regarded as competitors or “in competition” for the purpose of the restraint.

Mr McMurchy had confidential information as a result of his role as a manager with the plaintiff. He had been integrally involved in the development and launch of new software. This was information that could be used by the second defendant to the detriment of the plaintiff. The amount of time the confidential information would remain current was relevant to determining the time for the restraint.

Mr McMurchy also breached his express contractual duties to faithfully and diligently perform and to promote the interests and prosperity of the plaintiff, and his implied duty of fidelity and good faith, by inducing or encouraging Mr Kumaran to leave the plaintiff.

Second defendant liable for inducing breach of agreement

The second defendant was also liable for the tort of inducing Mr Kumaran’s breach of his agreement with the plaintiff. Importantly, the second defendant was found to have had an intention to induce or procure the breach. The second defendant positively encouraged Mr McMurchy to recruit Mr Kumaran to leave his employment with the plaintiff who then suffered loss as a result of Mr Kumaran resigning.

Mr Kumaran — breach of agreement and restraint enforceable

Mr Kumaran was in breach of his employment agreement by working for the second defendant. It was “entirely reasonable” for the plaintiff to impose restraints on Mr Kumaran to protect the use or misuse of the plaintiff’s confidential information. In his role as “sales partner” he had access to a lot of confidential information and was “intimately involved in the needs and potential needs of customers”.

The court found a nine-month restraint was reasonable, given the amount of time Mr Kumaran would retain the plaintiff’s confidential information and how long it would remain current.

Injunctive relief to protect plaintiff’s confidential information

The court considered injunctive relief was appropriate to restrain Mr Kumaran and Mr McMurchy from using acquired knowledge and familiarity with the plaintiff’s confidential information.

Key lessons learned…

When you entrust any employees or partners with the keys to your business success—whether that be access to confidential information, the opportunity to develop relationships with your key clients, or the chance to work with the people you have recruited, developed and invested in—you are taking a risk: a risk that they will want to emulate your success for themselves or for someone else.

The only chance you have to protect against this risk is via a well drafted restraint of trade clauses in employment agreements.

The case demonstrates that if you do have regard to what the law requires, including defining the interest you are trying to protect, then your restraint may very well provide the intended protection.

With costly implications if you get employment agreement clauses wrong, it is best to ask for expert advice sooner rather than later.  Akyra can work with your business to assist and support you with employment agreements.

If you require advice or assistance with your businesses employment agreements or employee management, contact Akyra on 07 3204 8830, for an obligation-free conversation or to discuss any queries you may have.

If you require advice or assistance with any people management circumstances or managing your workforce post-pandemic, contact Akyra on 07 3204 8830, for an obligation-free conversation or to discuss any queries you may have.

Contact us now to book a time to discuss your areas of potential concern and we will then provide a way forward where it might be needed.

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Disclaimer – Reliance on Content

The material distributed is general information only. The information supplied is not and is not intended to be, legal or other professional advice, nor should it be relied upon as such. You should seek legal or professional advice in relation to your specific situation.

 

Source: https://www.lexology.com October 2021, https://www.mondaq.com October 2021, Employsure Ltd v McMurchy; Employsure Ltd v Kumaran [2021] NSWSC 1179, 17 September 2021.

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