Tuesday, 16 July 2013

Employment Restraints – Are they Binding?

Restraints can bind employees from working for former clients – but only if they are properly drafted

Restraint of trade terms in employment contracts are often challenged, particularly when they try to prevent departing employees from later working for or accepting approaches from former clients.

But one recent decision has confirmed that such restraints can be enforced – but only where they are properly drawn and go no further than necessary to protect the employer’s business.

The case of Wallis Nominees (Computing) v Pickett concerned an employee of a software consultancy company, Wallis Computing (DWS), whose business involved providing the services of its workers in placements with clients to help with their IT needs.

Pickett had been employed by DWS from 2007 to January 2012, and for most of 2011 had been placed with the construction firm, Grocon. In late 2011 Grocon restructured its IT department, and offered Pickett a management job. Pickett accepted the offer, and resigned from DWS.

In 2007 Pickett had signed a contract containing a clause that prevented him, for 12 months after his employment, from accepting or providing services to clients for whom he had worked at Grocon, or with whom he had been in contact with in the performance of his duties.

DWS sued to enforce the restraint

When the case was first decided, the Victorian Supreme Court refused to grant an injunction, primarily because it did not believe there was any “legitimate” interest in a case of this kind that would allow it to make orders preventing the employee from working for his former client.

When DWS appealed, however, the Appeal Court disagreed on this point, and held that an employer can protect its goodwill where the employee has a sufficiently close or personal relationship with a client such that it was possible that he could later influence its decisions about where to give its business.

Despite this, the Appeal Court still held that a 12 month restraint was too long. Because the employment contract did not contain any shorter periods, and because the clause was too widely drafted in other respects, it still could not be enforced.

What this means for you

At a practical level, the decision was a victory for the employee. But the case also stands for the proposition that restraints can be enforced to prevent employees from accepting approaches from former clients – provided that the clauses are properly drafted.

Restraint of trade clauses must be carefully prepared and go no further than necessary to protect a business’ legitimate interests. Care should always be taken to ensure that they reflect the duties performed by each employee and the work performed for clients.

If you are hiring new staff, or wish to introduce terms to protect your goodwill, contact us to have your agreements reviewed or prepared.


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.

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