Very many employment agreements contain provisions in restraint of trade. These are contractual terms which limit an employee’s freedom to do certain things once the employment relationship has ended. Restraints of trade can take any number of forms, but frequently they prevent employees working for a competitor, working in the same industry, or soliciting clients.
Often, employees come to me for advice on these restraints when they have ended the employment relationship to take up a new role and it has been (belatedly) suggested to them that they are prevented from doing so by a restraint of trade provision. Startlingly often, they look to me to confirm what they were told by a lawyer, accountant, friend or some other advisor, that “restraints of trade can’t be enforced”.
I am here to tell you that advice is wrong! Restraints can be enforced, frequently to devastating effect. The full story is this:
1. The law loves contracts. The law believes with the energy of a thousand suns that if you agreed to do something (and got something in return for that agreement), you should be held to your promise.
2. The law doesn’t like contracts that are anti competitive – that is restrict a person’s ‘market freedom’.
These two principles clash head on in restraint of trade cases – because the employee has agreed to do something, but that something is a bad thing. So, the law has developed a work-around, which goes like this:
1. The starting point is to presume that the restraint is unenforceable.
2. However, the restraint can be enforceable if certain conditions are met – namely, that it exists to protect a proprietary interest of the employer, and it is no more than is reasonable to protect that interest.
Step one is the piece of advice that gets handed out like religious tracts. Step two is the much more important bit. That is because if the employee controls something that is essential to the employer, such as client goodwill, or intimate knowledge of designs or systems, or a particular piece of commercially sensitive knowledge, then they can be restrained to a reasonable degree to protect the interest of the owner of that thing.
Take an example of a barista in a coffee-mad metropolis who has a reputation for making the finest flat white in the city. Coffee drinkers flock to this particular coffee cart to experience the uniquely awesome qualities of this person’s beverages. The barista controls the goodwill that makes the employer’s business successful. And, should they move to some other coffee shop down the road, the employer’s business might well be decimated. This example comes from a real case, and in that case, the Court concluded that it would be reasonable to prevent the barista making coffee within walking distance of the former employers, until such time that the customers had been given the opportunity to experience the work of the replacement barista.
Or an alternative example of a salesperson who travels the country servicing the office supplies needs of customers. The salesperson has learnt over the years about each customer’s rate of using photocopy paper, or sticky notes, or biros. This is what makes them a great sales person, and the customers love their rep because they are so onto it. Should that person start working for a different supplier, he or she would have a wealth of information that would enable the relatively seamless transfer of clients from one supplier to another. Again, it would be reasonable to limit the salesperson’s freedom to protect the employer’s clients.
Sometimes, Step Two is interpreted to mean that if a restraint is over-the-top in terms of its limits, it can not be enforced, even if there is an interest to protect. This is also wrong. The ERA or the Court may modify a restraint of trade so that it is reasonable – limiting its application to a particular geographic area, or for a short time period.
The other important thing to understand is that where there is an alleged breach (ie you commence work for a new employer in direct competition with the old), contractual restraints of trade can be enforced on an interim basis by an injunction. An injunction is an order by a Court or Authority that something happen (or stop happening) until the matter has been properly heard by the Court.
An interim injunction is relatively easy to get – an employer seeking an interim injunction only needs to prove that it has a reasonably arguable case that there is a restraint that applies to the situation, and the employee can be ordered to cease activity in breach of the restraint. An interim injunction can be obtained in a matter of weeks – usually well under a month. While the employee has the chance to argue that the restraint should not be enforced, often this comes some time after, and although there might be compensation if an injunction was wrongly issued, the effects in the meantime can be devastating.
Restraint of trade law is complex, and each case turns on its own facts. Employers who hope to rely on generic restraints put in their precedent employment agreement will likely be let down. However, employees who rely on the advice that “restraints are not enforceable” will also likely find themselves in a tight spot when the relationship ends.
The best advice to an employee entering a new employment relationship is that they should critically examine the restraints against the principles above, and negotiate reasonable restraints that they can live with before it becomes urgent.
