Are the post-employment restraints in your contracts enforceable?

When an employee leaves a business, they take with them a great deal of confidential information and a rapport with that business’ clients that can be damaging to the initial employer if taken to a competitor. To prevent this, we recommend employers include restraint of trade clauses in employment contracts. It is important to keep in mind, post-employment restraints are prima facie unenforceable, meaning that on face value an employee cannot be restrained from working for a competitor. In order for a restraint to be enforceable, it must be necessary to enforce such a restraint to protect the employer’s legitimate business interests and it must be reasonable to enforce the restraints. The Supreme Court of Victoria recently narrowed the operation of restraints by encouraging an analysis of the business’ conduct prior to the cessation of the employee’s employment.

Case Study: Crowe Horwath (Aust) Pty Ltd v Loone [2017] VSC 163.

Mr Loone was employed by CHA as Managing Principal from November 2012 until January 2015 when CHA was acquired by Findex Group Ltd. Soon after, Mr Loone expressed an intention to open his own accounting practice that may take clients away or otherwise compete with CHA. CHA sought an injunction to prevent Mr Loone competing with 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, the Court considered CHA’s conduct in the final days of Mr Loone’s employment, in which 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 restraints.

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.”

Lessons for Employers

While a restraint of trade clause may be necessary to protect an employer’s legitimate business interests, in general Courts do not look favourably on them. Employers should be careful about the construction and treatment of their restraints, to ensure that they remain enforceable. Further, employers should be mindful that their own actions do not lead to employment contracts being void, thus making restraints unenforceable.

HR Legal works with employers to contrast restraints of trade that are tailored to your business and can help to keep them reasonable and relevant. HR Legal also reviews current employment contracts to identify and minimise potential risks arising. If you require assistance in relation to these areas, please contact us.

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This article was produced by HR Legal. It is intended to provide general information only in summary format on legal issues. It does not constitute legal advice, and should not be relied on as such.