The current fluidity of employee movement across different organisations, combined with the ease with which confidential information can be transferred from one electronic device to another in many of today’s Australian workplaces, highlights the need for businesses to have robust and up-to-date employment contracts in place with all its employees, writes Jeremy Cousins.
For many AMTIL members, and other organisations involved in manufacturing technology, employees will have access to sensitive client, product and/or supplier information. Employees will also often have access to confidential processes and techniques, equipment details, pricing information and typically for more senior employees, information about strategy and business direction. Where this information could cause damage to an employer should it fall into the wrong hands, there are likely to be legitimate grounds upon which an employer may seek to protect it.
While employees will be bound by a series of implied contractual and statutory obligations in relation to the protection of confidential information, the extent of these obligations can be unclear. Without a properly tailored clause in an employee’s employment contract, there is likely to be significant doubt about the scope of the implied contractual and statutory obligations.
Further, Australian courts will not imply a post-employment restraint: where an employee’s contract does not provide such an obligation then (subject to the employee’s compliance with any obligations relating to confidential information) the employee will be free to compete with their previous employer immediately upon termination of their employment.
There is no doubt that post-employment restraints are difficult to craft effectively. However, where they are very carefully tailored to protect an employer’s identified legitimate business interest and go no wider than is reasonably necessary they will (subject to compliance with a range of other issues) be enforced by the Courts. The use of “boiler plate” restraint clauses is almost always an entirely ineffective approach.
In many cases, an employer may obtain short-term protection against competition by requiring an employee to take “garden leave” during the period of notice. Again, in this situation, the employment contract should include a properly tailored and relevant clause. However, in many cases, a restraint applying after the employment ends will also be required.
A quick overview of the most typically relevant issues in relation to post-employment restraints is below:
- The starting point is that restraints are presumed to be void.
- However, an employer can rebut this presumption where it can show that the restraints go no wider than is reasonably necessary to protect an identified legitimate business interest. There must be some valid basis for the restraints; the Courts will not enforce a restraint simply to prevent competition. Typically, a valid legitimate business interest might relate to: (1) confidential information and trade secrets; (2) customer connections and relationships; (3) supplier connections and relationships; or (4) protection of the employer’s stable and trained workforce against poaching from former employees.
- For post-employment restraints to be enforceable, typically some form of consideration (payment or benefit) must be provided to the employee when they enter into the restraint (and not afterwards as often happens).
- A Court will also consider whether the terms are certain and can be understood. It is typical for post-employment restraints to be drafted using “cascading” or “waterfall” clauses. The purpose of this is to allow a Court to strike out what it considers to be an unreasonable term and leave a lesser, but reasonable, term in its place. However, in some cases the restraints have included too many combinations and permutations and the Courts have refused to enforce them on the grounds of uncertainty. Indeed, in one case there were 82,152 possible combinations (of the restraints combined with the various geographical areas and time periods, etc.) and the Court refused to enforce the restraint on grounds of uncertainty.
- To be enforced, the scope of the restraints must be reasonable. The restraints must go no wider than is reasonably necessary to protect the identified legitimate business interest. For example, if sensitive software and design information for a new CNC machine will become public information in six months’ time, a 12-month restraint to protect this information would be unenforceable.
- The validity of the restraints will be determined at the date that they were given. Where an employee has restraints in a very old employment contract this can be problematic, particularly where the nature of the business has fundamentally changed.
- Many post-employment restraints still seek to impose restraints by protecting defined geographical areas. In many modern workplaces where customer needs are met by email, telephone, video conferencing and with the use of other technology in place of face-to-face meetings, restraints preventing employees from physically engaging in certain activities within a defined geographical area may be largely irrelevant.
- The Courts will also consider whether it is in the public interest to enforce the restraints. A Court could find that whilst the restraint is reasonable between the parties it is not reasonable in the public interest.
In summary, post-employment restraints will be enforceable where they are carefully crafted and relevant to the particular issues. If they are not tailored to the relevant circumstances, it is likely that employees will be able to ignore the restraints in the employment contract entirely on termination of their employment, or as described in accordance with modern-day legalese “drive a truck through the restraints”.
Jeremy Cousins is a Principal of Whitehall Workplace Law. Whitehall Workplace Law is able to assist AMTIL employer members with all employment law, industrial relations and occupational health and safety matters.