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Post-Employment Restraints – are they worth the paper they are written on?

contract

When an employee walks out your door for the final time, they can take with them a substantial amount of confidential information including information that can be taken to a competitor.  A way to prevent this is to include restraint of trade clauses in employment contracts. 

Whilst it is important to remember that on face value an employee cannot be restrained from working for a competitor, if it is deemed necessary to enforce a restraint to protect the employer’s legitimate business interests and it is reasonable to enforce the restraints, a restraint of trade will be enforceable.

The Supreme Court of Victoria determined a restraint not enforceable, by conducting an analysis of the employers’ conduct prior to the cessation of the employment contract.

In Crowe Horwath (Aust) Pty Ltd v Loone [2017] VSC 163 Mr Loone was employed by CHA as Managing Principal when CHA was acquired by Findex Group Ltd.  Not long after, Mr Loone expressed his intention to open his own accounting practice that may take clients away from CHA.  CHA sought an injunction to prevent Mr Loone competing against them based on a restraint clause in his employment contract.  Initially the court found that the restraints in Mr Loone’s contract were enforceable because CHA had a right to protect its legitimate business interests.  However, when the Court considered CHA’s conduct in the final days of Mr Loone’s employment, where a bonus payment was not paid, the Court found that the Company’s actions constituted a repudiation of the contract and Mr Loone accepted that repudiation, which resulted in the entire contract being void, including the post-employment constraints.  The Court stated that “The restrictive covenants….of the Contract do not survive the termination of the Contract effected by Mr Loone’s acceptance of CHA’s repudiatory conduct.”

What do we take from this?

·         In general, Courts do not look favourably on restraint of trade clauses. 

·         An employer must ensure that their own actions do not lead to employment contracts being deemed void, thus making restraints unenforceable. 

·         An employer must be careful about the development and treatment of their restraints to ensure that they remain enforceable.  

Information in HR Advice Online guides and blog posts is meant purely for educational discussion of human resources issues. It contains only general information about human resources matters and due to factors such as government legislation changes, may not be up-to-date at the time of reading. It is not legal advice and should not be treated as such.

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