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Post-employment restraints - What preventative steps can be taken?

What steps can an employer take to ensure that an ex-employee does not divulge or misuse confidential company information when they leave their employment?

Is there anything that can be done to prevent an ex-employee from disclosing or misusing sensitive information?

Employers are often concerned that an ex-employee may seek to engage in conduct such as:

  • soliciting or headhunting previous clients, customers and even staff members,
  • being the competition by starting a very similar business within the same area,
  • using intellectual property developed while working for you or
  • sharing confidential information gained in the course of employment.

However, there are a number of obligations that both an employer and employee will continue to owe to each other once their employment relationship comes to an end. Similarly, there are several sources of post-employment obligations that will apply to an ex-employee, including:

1. Contractual obligations:

Post-employment restraints are a common feature in many employment contracts, particularly in circumstances where an employee:

  • has access to confidential information that goes beyond mere know how, and is in a position to use that information to the employer’s detriment;
  • works in a position that involves direct personal contact with customers and may be able to use those connections to ‘poach’ customers away.

An employer can seek to protect their confidential information and intellectual property through including obligations covering:

  • Post-employment restraints which restrict the employee’s ability to:

- poach or take clients with them after their employment ends

- contact the employer’s clients for a set period,

- take or entice employees or suppliers, or contacting them for a set period, or

- accepting work from a customer or client for a defined period

- from owning or working for a competing business within a defined geographical area.

  • Intellectual Property clauses, which set out that it is the employer who owns any intellectual property that the employee creates during the course of their employment.
  • Confidential Information clauses which seek to protect the employer’s confidential information gained during employment, setting out the types of information that cannot be used post-employment.
  • Termination clauses will also commonly set out an employee’s obligations post-employment, such as the requirement to return company owned property and confidential information.

within their documented contracts of employment.

Employers may further seek to reinforce post-employment restraints through implementing a company policy that clearly identifies what information is considered to be confidential and that describes the obligations of employees in relation to such information. The existence of such a policy can act as a deterrent to any employee contemplating such action.

2. Common law obligations:

Employees also have additional obligations that extend beyond the term of their employment agreement. There is a common law duty of good faith and fidelity which will continue after the employment relationship has ceased under what is referred to as an employee’s ‘fiduciary duty.’

Under common law, employees are obligated to:

  • serve their employer in good faith,
  • act to protect their employer’s interests and
  • not to disclose confidential information for self-serving purposes.

Although this common law duty is not documented with an employment contract, it is an obligation that has developed through case law over time and is implied into the contract. 

3. Statutory Obligations

Employees owe obligations to their employer in relation to section 183 of the Corporations Act 2001 (Cth). This Act sets out that an employee (and directors and other officers) of a corporation, who has gained information as a result of their role, must not improperly use the information to gain an advantage for themselves, another person or cause detriment to the business. Employees are not allowed to use copyright protected material without consent from you as their previous employer

Enforceability of post-employment restraints:

While they are a common feature of most employment agreements, it is important to note that post-employment restraints can often be a complex area to navigate, and their enforceability is often entirely dependent on the circumstances of each individual case. As such, it  is recommended that legal advice be sought when seeking to draft restraint clauses.

In order for post-employment restraints to be enforceable, the employer will need to be able to demonstrate:

  • that the restraint was reasonable at the time it was agreed to.
  • that it has a legitimate interest in imposing the restraint, and that
  • the restraint is no wider than is reasonably necessary.

While not an exhaustive list, the following factors will be taken into account when consideration is being given as to whether a restraint is likely to be enforceable:

  • the nature of the restrained business activity
  • the geographical area bound by the restraint; and
  • the duration of time for which the restraint applies.

Even where an employer does have a legitimate interest to protect, a post-employment restraint must be reasonable in its duration, geography and in the activities that it seeks to restrain. A restraint clause cannot be applied for the purposes of limiting competition or to enable the employer to maintain a competitive advantage. Case law has shown that the courts will not enforce a post-employment restraint provision where the restraint is not necessary for the reasonable protection of the employer’s legitimate interests.

What can you do if an employee breaches a post-employment restraint?

In the event that any ex-employee is found to be engaging in conduct that is non consistent with the post-employment restraints, employers will need to consider whether to pursue this as a civil matter (as an employment relationship is no longer deemed to exist). It is recommended that legal advice be sought prior to any action being taken.

Generally as a first step, a letter of demand will be issued to the ex-employee, setting out their obligations, the breach and the requested action. If the matter is not resolved, further action may include seeking an injunction or damages. 

If you require advice or assistance with reviewing your current employment agreements, or if you require assistance on any HR matter, please contact the team at HR Advice Online at [email protected] or on 1300 720 004.

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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