Post-employment Obligations: Restraint of Trade and Non-Solicitation

Article by Jason Papoutsis, Litigation Lawyer

What Employees and Employers should know

Quite often, when the employer-employee relationship ends, employees often forget that some of the clauses within their employment agreements often extend beyond the employer-employee relationship.

Even in circumstances were no employment contract exists, employees might still owe a fiduciary duty to their employer which may extend beyond the employer-employee relationship.

Common issues that often arise in relation to restrain of trade and non-solicitation include:

• former employees working with one of their main competitors and/or divulging trade secrets to that competitor;
• former employees opening up a new business which directly competes with their former employer’s business;
• accusations of employees stealing trade secrets or client list;
• former Employers working in the same industry and in close proximity to the former employer’s business;
• ‘stealing’ or soliciting clients, patients, suppliers, distributors, etc;

Has one of your employees breached their post-employment obligations?  Or is your Employer claiming that you have breached these post-employment obligations?

If so, you should seek legal advice immediately. Potts Lawyers offers both paid and free consultations depending on the complexity of your matter.

Restraint of Trade Clauses

Post-employment ‘restraint of trade’ clauses are commonly used by employers to protect their legitimate business interests once the employer-employee relationship ends.

It is not uncommon for employment contracts to contain a provision which restricts the employee (after leaving the employer) from a particular type of work, within a stated area, and for a stated period of time.

What is a ‘Reasonable’ Restraint?

The existence of a restraint of trade clause is not an immediate victory for the employer. In fact, it is quite the opposite: restrain of trade clauses are presumed to be invalid from the onset.

A restraint of trade clause must be directed at protecting a specific legitimate business interest, such as confidential information or business goodwill, and the restraint cannot be wider than that reasonably required to protect those interests.   It is for this reason that, as a starting point, the courts presume that a restraint of trade clause is invalid until proven otherwise.

Therefore, an employer’s restraint of trade clause will only be upheld if the employer can show that circumstances exist which make the restraint reasonable.  In assessing what a ‘reasonable’ restraint is, there are numerous factors that the court considers, and each case is highly dependent on the facts.

Non-Solicitation Clauses

Non-solicitation clauses are a little different from a restraint of trade clause since they attempt to serve the more narrow function of restricting an employee from contacting the employer’s clientele, patients, suppliers, etc.

This is especially true within the employment contracts of more senior professionals or their administrative staff, since these individuals often build a strong rapport with a large proportion of the employer’s client base and/or suppliers.

It is not uncommon for an employee to leave a company and for the employer to notice only months later that a substantial decrease in business has occurred.  In these circumstances, the best course of action is to ascertain whether your former employee has utilised confidential client information, such as a client database, and to get legal advice as soon as possible on the course of action that you should adopt.

Similarly, it is also quite common for an employee to leave their employer in good faith, only to have  their most loyal clients or patients follow them in their own free-will.   In many of these instances, the employer might wrongfully accuse the former employee of ‘stealing’ clients.

 

What if there was no employment contract?

Even without an employment contract, the former employee might owe a fiduciary duty to their former employer at common law.

Generally, a fiduciary relationship means that each party would owe each other a duty to act honestly, in good faith, fairly, and loyally.   It has been established that, generally, employees owe a fiduciary duty to their employers, and to a certain extent this duty may extend beyond the termination of the employer-employee relationship.

Therefore, even in circumstances where no contract was signed, or where these clauses do not exist in the employment contact, caution should be exercised by both the employee and the employer.

For instance, even if no employment contract exists, an employee would still likely owe a fiduciary duty to act in their former employer’s best interests and not their own interests at the former employer’s expense.   This would, for instance, include the duty not to misuse the former employer’s confidential information, such as client lists, trade secrets, etc.

 

I’m being accused of (or think that my employee is) “Poaching” Clientele, Patients, Suppliers. What next?

Caution should always be exercised by the employee before accepting work from their former employer’s clientele. Whether or not a contractual restraint exists, you should obtain legal advice on what work you might be able to accept from your former employer’s clientele, etc.

Likewise, an employer should be cautious about sending a letter which makes false allegations about a former employee ‘stealing’ contacts, before receiving legal advice on whether the employee is liable for that conduct.

Regardless of which side of the argument you’re on, it is very important that you get legal advice on the post-employment obligations in question, or whether conduct which has already occurred might amount to a beach of said post-employment obligations, whether contractual or fiduciary in nature.

My Former Employee has breached his/her post-employment obligations in the Employment Contract. How strong is my case?

Generally, a well drafted employment contract should protect the employer’s interests in relation to their employee’s post-employment obligations.

However, the courts may be reluctant to enforce your restraint of trade clause or non-solicitation clause because of the relative inequality of bargaining strength between employers and employees.

Accordingly, if any of the clauses contained in your employment agreement are deemed to be ‘unreasonable’, enforcing them may be an uphill battle.

In tackling these issues, it is important that you engage a lawyer that can explain all the variables and who can give you clear advice on the strength of your position and your options.

Whether your former employee has signed up with your competitors, utilised confidential client information and trade secrets, or has even opened up a competing business, we recommend that you obtain legal advice on the unique facts and circumstances of your matter.

 

My Former Employer is accusing me of breaching my post-employment obligations: Do I have a defence?

It’s not easy being the ‘underdog’ with less resources than your employer.   Rest assured, the courts take this into consideration and there are numerous variables which may make your post-employment obligations unreasonable when considering this power imbalance.  This may include an unreasonably long restraint period, an unreasonably wide geographic area, and other industry-specific variables that must be taken into account.

Quite often, we have also seen employers make the mistake of withholding a former employee’s statutory entitlements such as overtime pay, annual leave entitlements, or even superannuation.  If this is the case, in addition to defending accusations of wrongdoing you might also need a voice for claiming what is rightfully yours.

Furthermore, if you believe that your own employer has breached the employment agreement themselves, such as by withholding any of your pay or entitlements or whatever the case may be, you might have the ability to claim that this amounts to a repudiation of the employment agreement.  This might allow you to treat the provisions of ‘restraint’ as unenforceable as a consequence of your employer’s repudiation, however you should always obtain legal advice before mounting such an argument.

If you have been accused of breaching your post-employment duties, or if you need general advice on your post-employment obligations, contact Potts Lawyers to protect your interests.

 

‘Is my case stronger than theirs?”

Each case is heavily dependent on the facts, and the courts have been reluctant to treat similar employment cases alike.  One important factor to remember, however, is that restraint of trade clauses and/or non-solicitation clauses could be rendered unenforceable in circumstances where public interest considerations are found to outweigh the interests of the party seeking to rely on it.

The notion of ‘public interest’ in this area generally relates to the protection of individual liberties, such as the right to carry on trade freely and earn a living.

 

What do I do next?

Whether court proceedings have been initiated, letters have been exchanged, or whether you are simply need advice on your legal position, we highly recommend that you seek legal advice from an experienced litigation lawyer when it comes to employment law & employment disputes.

Whether you are an employer seeking damages from a former employee, or whether you are being accused by your former employer of any wrongdoing, you should contact Potts Lawyers to ensure that your interests are protected to the fullest extent possible.

Disclaimer: The actual tests applied by the Courts are more detailed and complex.  Furthermore, the facts and circumstances of your matter are unique, and the law in this area continues to develop.  Accordingly, you should always obtain legal advice.

This article is only meant to serve as a brief summary of the topic described and does not constitute legal advice.