RESTRAINT OF TRADE CLAUSES IN EMPLOYMENT CONTRACTS

Published 18 January 2017 by Whitehall Workplace Law

A RECENT DECISION OF THE COURT OF APPEAL OF THE SUPREME COURT OF VICTORIA, HANDED DOWN IN LATE DECEMBER 2016, JUST GROUP LIMITED V PECK [2016] VSCA 334 (PECK CASE), BRINGS INTO SHARP FOCUS THE IMPORTANCE OF GIVING PROPER CARE AND ATTENTION WHEN DRAFTING EMPLOYEE RESTRAINT CLAUSES.

IN THIS LEGAL UPDATE WE ANALYSE THE CASE AND GIVE SOME TIPS FOR EMPLOYERS ON WHAT TO DO AND NOT DO WHEN REVIEWING AND DRAFTING RESTRAINT CLAUSES IN EMPLOYMENT CONTRACTS.

ISSUE

Restraint of trade clauses are frequently included in employment contracts with the intention that they protect an employer’s interests, such as confidential information and customer connections.

Restraint clauses are difficult to enforce but it is not impossible to do so if they are very carefully drafted.  In order to be enforceable, the party seeking to enforce the restraint must show that the restraint is reasonable and goes no wider than is necessary to protected the identified legitimate business interests of the employer.  The reasonableness of the restraint will be assessed by what the restraint hypothetically prohibits rather than whether the conduct in issue falls within the terms of the restraint.

In certain instances, if a restraint clause is drafted too broadly, thereby making the restraint unreasonable, the offending parts of the restraint clause may be severed to leave the remaining reasonable part of the restraint intact and enforceable.  However, the Peck Case emphasises the limits of employers relying upon the Courts to do this.

In the Peck Case, the employee was employed as the CFO of Just Group Ltd (Just Group), a speciality brand and fashion retailer.  The employee’s employment contract with Just Group included a restraint clause which restrained her from engaging in certain activities after termination of her employment with Just Group (Restraint Clause) for at least 12 months.

Only several months after commencing employment with Just Group, the employee accepted employment with another fashion retailer, Cotton On Group Services Pty Ltd (Cotton On) in a CFO level position – General Manager of Group Finance – and subsequently gave notice of her resignation to Just Group.

Just Group commenced legal proceedings seeking to enforce the Restraint Clause to prevent the employee from commencing employment with Cotton On until the applicable restraint period had lapsed (at least 12 months).

OUTCOME

The Restraint Clause attempted to prohibit the employee from:

  • being engaged in any activity which was the same as, or similar to, an activity of Just Group (and other related companies):
    • which the employee was involved in; or
    • in respect of which the employee received confidential information (First Limb); or
  • being engaged in any activity for or on behalf any of the entities listed in an Annexure (the annexure listed 50 entities which Just Group asserted were competitors, one of which was Cotton On) (Second Limb).

At first instance, the trial judge dismissed Just Group’s claims notwithstanding that it was determined that Just Group had a legitimate interest in protecting its confidential information and that Peck was in fact given access to its confidential information during employment.

The trial judge found that the First Limb did not make sense given the way that it was drafted and even if it could be understood it would otherwise be unenforceable as it would be too broad and therefore unreasonable.  It would prevent the employee from working in a new role where the confidential information she had acquired from Just Group would be irrelevant.

The trial judge also found that the Second Limb was unenforceable because it went beyond what was reasonable to protect Just Group’s legitimate interests.  Just Group had not established that 46 out of the 50 entities listed in the Annexure were in fact competitors and if enforced the restraint would restrict Peck from engaging in employment with the 50 entities where Just Group’s confidential information would be of no relevance to the new employer.  The Court refused to delete the 46 entities listed in the Annexure (or all entities other than Cotton On) and stated that doing so would require “the Court to engage in the task of curial disentanglement to salvage a patently unreasonable restraint” [at para 77, Just Group Limited v Peck [2016] VSC 614].

The Court of Appeal agreed that the Restraint Clauses were unenforceable but went on to make some interesting and helpful observations.  In summary, the Court of Appeal said:

  • A restraint clause is presumed to be void as contrary to public policy.
  • That presumption can be rebutted if there are special circumstances which demonstrate that the restriction is reasonable between the employer and employee and not unreasonable in the public interest.
  • A restraint will be reasonable if (at the time the restraint is entered into) the restraint clause is needed to protect an employer’s legitimate business interests and the clause does no more than is necessary to protect that interest (in time and scope).
  • A legitimate business interest could include an employer’s confidential information and trade secrets and customer connections. (There are also other categories of protectable interests.)
  • The Courts would not sever parts of the Restraint Clause which were too broad as doing so “is to reason backwards from allegation of ‘breach’ to construction and evaluation of the contract, rather than by an assessment of validity of the restraints at the time the contract was made” [at 57 Peck Case]. (The reasonableness of the restraint must be assessed at the time the restraint is entered into.)

IMPACT

The Peck Case highlights the difficulties employers are likely to encounter in seeking to enforce standard restraint clauses where insufficient care and attention has been given to the necessary limits of the restraints.  However, restraint clauses can be enforced where they are carefully drafted.  Employers must ensure that the restraints go no wider than is reasonably necessary to protect their specific business interests.  Where the restraint is too broad the restraint is highly unlikely to be enforced.

When reviewing restraint clauses in existing employment contracts, or drafting new restraint clauses, the following questions are likely to be relevant:

  • Is the employment contract itself valid? (Check that the contract has not been superseded by a new contract, such as an implied contract, or otherwise displaced.)
  • What is the relevant employee’s role? Is it necessary to include a restraint clause?
  • Has / is consideration (i.e. some form of additional payment or benefit) been / being provided to the employee in exchange for the employee entering into the restraints?
  • What are the specific business interests to be protected by the restraints? Why is protection necessary?
  • Do the restraints go no wider than is reasonably necessary in time and scope to protect those identified business interests? (Ensure the restraint clauses to do not include patently unjustifiable restraints.)
  • Are the restraint periods reasonable in light of the period of notice required to terminate? (Where the employment contract allows an employer to terminate the employment on only a short period of notice this may impact upon the need for a lengthy period of restraint.)
  • Does the employment contract overuse “cascading clauses” (and too many variables and permutations) in the hope that a Court will assist to find a reasonable and enforceable restraint? (Noting what the Court said in the Peck case about “disentanglement to salvage a patently unreasonable restraint”.)
  • Do you intend to create one single covenant (restriction) or separate covenants which are each independent of the others?

CONTACT

Whitehall Workplace Law

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