Protecting your business interests post-employment

Courts recognise that employers have legitimate business interests which warrant protection after an employment relationship ceases. Those business interests include: the protection of confidential information, the protection against solicitation of clients and the maintenance of a stable workforce.

Employers will be best placed to have protections upheld through carefully drafted confidential information and post-employment restraint clauses in employment contracts. However, even if there is no written contract, or if the contract does not include such clauses, an employer still has protections afforded under the common law and legislation. This is an important area for all employers including financial services businesses and should be taken into consideration by incubators and start-ups when establishing their businesses.

Post-Employment Restraints

It should not be assumed that post-employment restraints will be declared void. The last five years has seen an increase in courts holding employees to their “bargain” and enforcing contractual restraints.

Therefore, when entering into the employment relationship, or when an employee is offered a promotion or pay increase, it is important to consider if a restraint clause should be included in the employment contract or revised in light of the changes to their role.

Generally, a restraint clause has the following elements: the competitive activities restrained; the geographic area of the restraint; and the duration of the restraint.

The competitive activities typically restricted include: working for a competitor; approaching, soliciting or working for certain clients; and inducing an employee to end their employment.

In some clauses, rather than just stating one area and duration, there are cascading provisions which allow for a number of different combinations of restraints.

Where cascading provisions are included, courts may use the “blue pencil” test, or doctrine of severance, to strike out sections of the clause, leaving the remainder enforceable. However, care must be taken as cascading provisions can lead to uncertainty and render the restraint clause void for such uncertainty.

In one case, a clause which had covenants resulting in 82,152 permutations was found to be unreasonable and so unenforceable. However, the Supreme Court of Tasmania recently upheld a restraint clause which included more than 8,000 separate covenants: Bulk Frozen Foods Pty Ltd v Excell [2014] TASSC 58. That said, if cascading provisions are used, the number of permutations should be kept at a minimum to reduce the risk of the clause being unenforceable.

The Supreme Court of Queensland also recently considered the reasonableness of a cascading restraint and, of the three periods under consideration (18, 12 and six months), held 12 months was reasonable. That case, BDO Group Holdings (Qld) Limited v Sully [2015] QSC 166, concerned a chartered accountant who resigned from his employment, and sought to start a new practice.

A 12-month period for the client restraint was held to be reasonable as that period would permit new BDO Group employees to establish a rapport with the clients, having regard to the annual nature of the compliance work and there being differing frequency of contact with clients.

Unlike other States and Territories in Australia, in NSW the Restraints of Trade Act 1976  (NSW) (RT Act) allows the court to “read down” a restraint clause (rather than just striking out or “blue pencilling” certain parts) if the clause is otherwise sufficiently certain. However, again, we recommend a restraint clause be included at the outset which is likely to be upheld, instead of placing trust in the potential that the RT Act may be used to otherwise “save” an unreasonable restraint.

While many decisions focus on the protection of client connections, there have been recent cases in which non-competition restraints have been upheld and, further, in which damages have been awarded.

In Andrews Advertising Pty Ltd v Andrews [2014] NSWSC 318, an executive was ordered to pay nearly $560,000 to his former employer for benefits obtained as a result of breaches of his fiduciary duty during employment, and of his contractual obligation not to have any involvement within Australia with the business of an advertising agency until six months after his employment ended.

The Court concluded that Mr Andrews, in breach of those obligations, effected the diversion of work for a major client away from Andrews Advertising to AMC (another advertising company, of which his wife was the sole director and shareholder), and that Mr Andrews was involved in carrying out media placement work of AMC before and after his employment with Andrews Advertising ceased.

Employers intending to enforce post-employment obligations should act quickly as courts will not issue injunctions if there has been an unreasonable delay. Fairfax recently faced this when the Supreme Court of NSW declined to issue an injunction as it considered Fairfax was “guilty of delay in commencing [the] proceedings”, despite otherwise considering Fairfax had a strongly arguable case that a six-month restraint was reasonable: Fairfax Media Management Pty Limited v Harrison [2014] NSWSC 470.

Confidential Information

Employers are also entitled to have their confidential information protected. In some cases, Courts have even restrained former employees from approaching their former clients, in light of confidential information to which they were privy during their employment.

On 5 September 2014, the Federal Court of Australia issued an order restraining a former employee from dealing with certain clients for five months, pending the final hearing of the proceedings, despite there being no express contractual restraint clause in his contract: APT Technology Pty Ltd v Aladesaye [2014] FCA 966.

Mr Aladesaye had been dismissed because he had been conducting a rival business in competition with his employer. The court said Mr Aladesaye had had a significant “head start” over his former employer in securing the business of certain clients, and he had “used his position as an employee and possessor of APT’s confidential information to gain a significant advantage over APT”.

Confidential information is also protected at common law, and by the Corporations Act 2001 (Cth). Under the Corporations Act, it is unlawful for a person to improperly use information obtained due to their employment by a company to gain an advantage for themselves or someone else; or cause detriment to the company. A civil penalty can be imposed for breach of those obligations.

Further, it is a criminal offence if a person uses information obtained due to their employment “dishonestly” with the intention of directly or indirectly gaining an advantage for themselves, or someone else, or causing detriment to the company; or “recklessly” as to whether the use may result in them or someone else directly or indirectly gaining an advantage, or causing detriment to the company.

Drawing these obligations to the attention of a former employee can quickly reign them in, and result in them complying with their obligations in respect to information obtained during their employment.

In conclusion, it is important for employers to ensure that their business interests will be protected upon the departure of an employee. Ideally, contracts should be in place which include clauses designed to best protect an employer’s interests, taking into account the nature of the employer’s business, the role of the employee and the confidential information to which they will be privy.

However, if, upon departure of an employee, an employer is concerned they may be misusing information to which they were privy, there is still scope for the employer to seek to protect its interests by relying on common law obligations and provisions in the Corporations Act. Although, steps should be taken promptly if concerns arise, so the employer is not criticised for being “guilty of delay” should proceedings ultimately be commenced.