Do we need a Restraint on Restraints?

We have seen some articles recently discussing research conducted on the prevalence of post-employment restraints in Australia. One of the surveys found that non-compete clauses have become a “standard” clause in most employment contracts. While our own experience would tend to support this, we do not think that the use of restraints is a serious impediment to wage growth or labour mobility, as has been speculated. To begin with, many employers and employees believe (incorrectly) that no post-employment restraints are enforceable.

We review a lot of employment contracts, and a high proportion contain non-compete clauses of various flavours. Put simply, a non-compete clause is designed to stop an employee from working for, or as, a competitor for a period of time after leaving the employer. A large proportion of those non-compete clauses we consider to be unenforceable based on just a cursory review. This is often due to some basic drafting errors, as well as the widespread use of ill-fitting “boilerplate” clauses. But it is also due to the inherent legal problems with restraints themselves. By their nature, these restrictions on employees are a restraint of trade, and considered to be undesirable – and therefore unenforceable at law – for that reason.

So, does this mean that all post-employment restraints are unenforceable? No, it does not.  If the employer understands their legitimate, protectable interests, and the restraints are carefully drafted with those interests in mind, post-employment restraints can be enforceable, and effective. Restraints are a necessary protection from the unconscionable use by a former employee of know-how and know-who gained during their employment. The enforcement of a restraint is a very risky, and expensive undertaking for an employer. But without the potential to enforce a restraint, employers may be at the mercy of unscrupulous behaviour of their former employees.

Carefully drafted restraints should be in every employment contract. The trick is to understand what sort of restraints will be appropriate for protecting the employer’s interests, and how to draft a restraint that will be enforceable.

Non-compete restraints are generally very difficult to enforce. The research raised concerns about the “prevalence of non-compete clauses in low wage occupations”. But we do not think this can really be much of a concern: If we see a non-compete restraint in a low-wage occupation, our advice is that the restraint simply won’t be enforceable. It is not in the public interest to stop every competitor from trading. Much more is required to enforce a non-compete clause.

Our advice is not to bother with a non-compete clause for anyone unless they are fairly senior and have knowledge or expertise which is critical to the business. Employers put themselves on the back foot when they use a generic non-compete clause in every employment contract. Even if they are not enforceable, some employers may think that having a non-compete clause has a deterrent effect on employees. We don’t think this is the case. If you are going to have one, tailor it to meet the circumstances, considering the nature and scope of the business, as well as the employee and their role.

Non-solicit restraints are also used to stop employees using their knowledge and connection with customers, as well as other employees, to entice those people away from the employer.  If used and drafted correctly, non-solicit restraints are more likely to be enforceable, and can therefore be a much more tailored and effective tool to protect the employer’s interests.

Similarly, well-drafted obligations relating to the use of confidential information are a fundamental and indispensable protection for employers, and should be in most employment contracts.

While we think the effect on the labour market and mobility is debatable, this is a timely reminder for employers to consider their use of post-employment restraints.

Lessons for Employers:

  • There are many legal tools available to protect an employer’s interests both during employment, and after termination
  • Consider the use of non-compete clauses in employment contracts – are these really effective to protect your interests?
  • If you do have them, make sure they are carefully drafted, considering the nature and needs of the business, to assist enforceability
  • Consider the need to review and update the restraints for long-term, or senior staff members who acquire valuable knowledge or strong customer connections. It may be necessary to strengthen these restraints as the employee develops and becomes more valuable over time.
  • You can’t change the terms of a restraint in an employment contract without the agreement of the employee. A promotion or “pay-bump” presents a good opportunity to review, update or introduce restraint terms.

If you would like to discuss these or other workplace issues please contact Andrew Bland or call 02 9412 3077.

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