TERMINATION OF EMPLOYMENT – RESTRAINT OF TRADE
Restraint of trade clauses are more often than not included in employment contracts in order to restrict a departing employee from competing with their former employer. They can be individually drafted and may include a number of restraints, including prohibiting the employee from soliciting, canvassing or approaching clients and staff of the former employer or starting a business that would compete with the former employer. More specifically, restraint of trade clauses are intended to protect the customer base, goodwill and legitimate interests of the business after the termination of employment has occurred.
It is a well established common law principle that restraints upon the free exercise of trade are void as a matter of public policy. In principle the test of enforceability is straightforward. A restraint of trade will be void and unenforceable at common law, except to the extent that it is, in all the circumstances no more than is reasonable. The onus rests upon the party seeking to enforce the restraint to establish its reasonableness.
Restraint clauses have a long history and over the years there has been increasing support for the imposition of restraint of trade clauses directed at protecting the goodwill of a business resulting from the departure of an employee who in the past provided professional services on behalf of an employer.
A recent case involving restraint of trade was heard by the Supreme Court of Victoria Court of Appeal in September 2011 and judgment was given in April 2012. The case involved an accountant, Liam Money and his former employer.
Birdanco Nominees Pty Ltd v Money  VSCA 64
Liam Money (Money), was a former employee of Bird Cameron Chartered Accountants (Bird Cameron). Money signed an employment contract with Bird Cameron upon commencement of his employment. Money resigned after more than six years of employment. Subsequently Money gained employment with a firm in competition with Bird Cameron and began work for a former client of Bird Cameron, whom Money had provided accounting services to during the 12 months prior him ceasing his employment with Bird Cameron.
The Restraint of Trade Clause
The restraint of trade clause included in Money’s employment contract sought to prevent the employee, for a period of three years from their departure, from providing professional services to any former client of Bird Cameron, with which they had developed a commercial relationship with, and provided professional services to, at any time during the three years prior to the cessation of employment with Bird Cameron. In addition the clause provided for liquidated damages in the amount of 75% of the fees incurred by the client for services rendered by Bird Cameron in the last full financial year in which the client remained a client of Bird Cameron.
This particular restraint of trade clause was deemed to be relatively narrow in its application. It did not prevent the employee from working in the same field or from providing the same services which were provided by them at the former employer. In addition, the clause did not prevent the employee from providing services to a client of Bird Cameron, but rather those they had provided services to in the course of their employment with whom they had developed a continuing relationship. Justice Maxwell stated ‘That is precisely the kind of connection which, the authorities make clear, the employer is entitled …within reasonable limits… to protect.’
Money argued that the restraint of trade clause only applied to professional chartered accountants providing professional services to clients of Bird Cameron. Subsequently, Money believed the clause was not enforceable on him as he was not a qualified chartered accountant. This was rejected by the Court. It was deemed that in order for the clause to apply, there must have been a ‘client connection’. In determining whether this had occurred Justice Maxwell stated that ‘there is an obvious need for such continuing or recurrent relationships to exist between clients and employees, as well as partners, of the firm.’
The Court of Appeal considered the restraint of trade clause at the time the agreement or contract was entered into. The court determined that the nature of the restraint, the extent to which it operated and the damages payable were such that the restraint was no more than was reasonably required to protect the legitimate interest of Bird Cameron.
Accordingly, the Court considered that the restraint of trade clause, at the time the agreement was entered into, was fair and enforceable. It held that the restraint was no more than that which was reasonable to protect the legitimate interests of the Bird Cameron. As a consequence of the Court deeming the restraint of trade clause to be enforceable, Money was ordered to pay the former employer the sum of $188,495.65 plus interest. In addition the Money was ordered to pay costs of the proceeding.
Lessons for Employers from the Case
The general rule regarding post-termination restraint clauses in employment contracts is that Courts will regard them as unenforceable, unless the employer can prove they are reasonable. As this case demonstrates, where the various elements of a restraint provision go no further than what is required to genuinely protect the interests of the employer, based on a best estimate of what will unfold during the employment relationship, Courts are prepared to enforce such terms against former employees.
It is important that an employer who seeks to rely on a post-termination restraint can demonstrate the clause was appropriately drafted and reasonable in all the circumstances at the time the contract was formed.
This may mean an employment contract will need to be varied from time to time to amend a restraint provision, if necessary. For example, this might be required when an employee changes roles or is promoted to a new position, especially where they will have greater responsibility for service delivery or increased client contact as a result.
Factors the Court May Consider
The Courts may consider a number of factors in determining if they will uphold or set aside a restraint of trade clause specified in an employee’s contract, including but not limited to:
- Whether the clause legitimately protects the employers interests;
- Whether the clause is reasonable to protect the legitimate interests of the employer;
- Whether the restraint of trade clause is attempting to preclude ‘mere competition’;
- Position of the employer and employee during the discussion phase and whether there was a significant imbalance of power;
- Whether the restraint will affect the employee’s ability to earn a living.
- In order to ensure the best chance of having a restraint of trade clause upheld it is important that:
- The restraint specifically relates to the employee, the business and the employee’s position in the business;
- The clause is reasonable in the circumstances from both the employer and employee’s perspective;
- The employee be given an opportunity to obtain independent legal advice before signing the contact if they wish to do so;
- If a restraint may be considered onerous then provision for an additional payment to the employee as compensation is included;
- Cascading provisions are used particularly in relation to duration and geography of the restraint as any restraint viewed as unreasonable by the Court can be severed from the contract without affecting the validity of the remaining restraints;
Pointon Partners Lawyers and Trade Mark Attorneys review and prepare contracts of employment that include restraint of trade clauses as well as provide advice on restraint of trade issues in addition to other general employment related issues. If you have any queries, or would like further information in relation to restraint of trade clauses or any other employment issue, please contact Michael Bishop or Sophie Ware on (03) 9614 7707.