Restraints are included in most contracts and exist to protect a business’s confidential information and interests, in an effort to remain competitive. These restraints are implemented by employers to protect their interests due to the confidential information employees hold whilst employed and when they leave.
These restraints can impact employees in numerous ways.
For example, common restraints include:
- Non-Compete clauses
- Preventing an employee from being engaged or employed by another employer in a similar profession.
- Preventing employees from starting a new business in the same field.
- Non-solicitation clauses
- Restricting an employee to perform work for a competitor.
- Not soliciting or accepting an approach from particular clients.
- Prohibiting either soliciting or accepting an approach from employees or contractors.
- Non-recruitment clause
- Prevented from encouraging a third party to end their contract.
- Confidentiality clause
- Prevention against the disclosure of employers’ confidential information.
Enforceability of Restraints
Typically, restraints of trade are considered void and unenforceable at law unless the restraint is shown to be reasonable and in the public interest.
It will be the responsibility of an employer to prove to the court that a restraint of trade is reasonable if they want to enforce it. This involves satisfying that:
1. The employer is seeking to protect a legitimate interest; and
2. The restraint’s scope is reasonable in protecting this interest.
Legitimate Interest?
As an employer, the restraint must protect a legitimate interest. A legitimate interest has been recognised previously as:
- Protecting the employer’s current retention of employees.
- Protecting the confidential information of the business.
- Protecting the employer’s customer relationships.
This list is not exhaustive, however.
What Is Reasonable?
Employers need to exercise caution when protecting the interest, as the scope must not be unreasonable. When determining whether the scope of a restraint is reasonable, the court will consider:
- The jurisdiction/geographical area the restraint relates to;
- The duration/period of the restraint;
- The activities the restraint seeks to restrain; and
- The seniority level of an employee and the extent to which they were the ‘face of the business’.
Severance and Cascading clauses
Even where it is determined that an employer has a legitimate interest to protect, but the scope of a restraint is unreasonable, the court will consider any unreasonable restraint term as void.
“Blue Pencil Test”
Therefore, where possible the court will sever the part of the restraint which is unreasonable, to allow the reasonable aspects of the restraint to be applied. The method, which is applied at common law in all jurisdictions, excluding NSW, is the “blue pencil test”. This involves striking out unreasonable sections of the restraint, however, the terms of the restraint cannot be modified or altered to affect the way in which the restraint applies.
”Read Down Test”
In NSW, the position is different. Restraints are able to be “read down” pursuant to the Restraints of Trade Act 1976 (NSW). This results in restraints being more likely to be enforced in NSW as the court is not limited to the “blue pencil” approach, but rather are able to modify the provision to offer some protection to the legitimate interest which has been identified.
As a result of these tests, restraint clauses offer the most protection when drafted as “cascading clauses”. However, employers need to note that cascading clauses can also be deemed as void due to uncertainty and therefore, the drafting of sufficient cascading clauses is a legally complex task. As such, employers are advised to obtain legal advice when implementing cascading restraint clauses.
Restraint Breached? These are the steps you can take.
As an employer, it is critical that further steps are taken to prevent any further breaches if a restraint has been breached by a current or former employee. Steps which can be taken include but are not limited to:
- Alerting the current/former employee that they have potentially breached a restraint and their contractual obligations; and
- If they fail to respond, an employer can issue a cease and desist letter.
However, if the breach persists, or has already caused significant financial damage, it is likely that legal action will need to be taken in the form of seeking an injunction to enforce the restraint. Where an injunction fails to prevent further losses, a claim can be brought for damages due to the loss suffered by a business.
Recent Successful Judgment Obtained by Chamberlains
Chamberlains recently acted for AEI Insurance in AEI Insurance Pty Ltd v Martin (No 4) [2024] FCA 1110.
The Federal Court ruled that Craig Martin, a former account manager at AEI Insurance Group, was required to pay $500,000 in damages after over 40 clients transferred to a competing brokerage firm he joined post-resignation. The court found Martin violated his contract’s post-employment restraint clause by soliciting clients. Additionally, he likely destroyed two mobile phones to obstruct information access, with one being damaged by a lawn mower.
Martin, who had extensive experience in the trucking and repair sectors, worked at AEI from July 2011, with a focus on expanding the business in Queensland. He was seen as the face of AEI in the region due to his skills in client assistance.
After resigning on 29 August 2022, Martin joined MA Brokers, effective 2 September 2022. His contract included a 12-month restriction on soliciting AEI clients. Despite this, he sent a text on 1 September 2022 to clients of AEI Insurance with his new contact details. The text read “Craig martins new phone number [New Telephone Number]”. AEI Insurance discovered this and requested compliance with the restraint clause and the return of company property.
By 3 November 2022, AEI learnt that 21 clients had moved to a MA Brokers. This resulted in Chamberlains seeking an injunction against Martin. Despite this, 24 more clients left for MA Brokers. The court noted the income from these clients was $752,978 in the year leading up to 28 August 2022.
Martin argued that clients might have left for reasons unrelated to his actions, citing his industry connections and skills. However, the court found this implausible, confirming that 45 clients moved to MA Brokers. The decision grouped clients into three categories, concluding Martin solicited most of them directly or through MA Brokers. This clearly breached his post-employment obligations with AEI Insurance.
The Court ruled in favour of AEI Insurance, awarding damages amounting to $500,000. This amount took into consideration those clients who were not solicited by Martin, the retention rates of clients, and uncertainties about client departures and policy renewals.
If your business has suffered a breach of restraints or post-employment obligations by an employee, please contact Chamberlains Law Firm for assistance. Our team of expert lawyers can provide bespoke advice and assist your business in mitigating the effects of the breach.
*This article was prepared with the assistance of Isabella Turner and Challita Tahhan.
If you have any questions about restraint clauses contact our Workplace Law Director Angela Backhouse on 02 6188 3600