A common question asked of me when I’m working with clients in relation to post employment relationships, specifically, restraint of trade is: “Restraints, how effective are they really? And, Are they worth the paper they are written on?”
The subject of employees deliberately taking potential future revenue from established client relationships and or trade secrets to a competitor is a particularly sore point with me personally. As a small business owner and employer myself, I can personally attest to just how much hard work and sacrifice is taken in establishing and building a business, especially in tough trading conditions. No one, in my personal opinion, not even the most imperfect employer, deserves to suffer deliberate attempts of sabotage to their business interests by an ex-employee.
At a recent presentation by Dianne Hollyoak of HWL Ebsworth, which I attended, it was communicated that restraint of trade clauses are in fact enforceable to the extent of what is classed as “reasonably necessary” to protect the legitimate business interests of the employer. Conversely, where the court finds that a restraint goes beyond what is reasonable to protect the legitimate business interests then the restraint of trade clause will not be enforced. As with all legal challenges and actions taken to pursue these types of matters it is a very costly exercise and often why some small business owners suffer in silence and do not take action.
To be successful, an employer, who is seeking to enforce the restraint, needs to be able to show that the clauses they have asked the employee to sign at the commencement of the employment relationship go no further than what is considered reasonably necessary to protect the employers legitimate business interests. Legitimate commercial interests include protecting commercial information and trade secrets as well as client relationships and employee relationships.
In putting restraint clauses in place, for post-employment the employer should be seeking to protect legitimate interests such as customers, goodwill, confidential information and trade secrets from use by a competitor to their detriment. Restraints during employment may include that they are not to have any other employment relationships or engage in any conflicts of interest whilst employed. So if the restraint clause can be no wider than is reasonably necessary – what is reasonable to protect your interests? It is advised to consider the following key elements when you are preparing or drafting restraints for your business:
- Scope and nature of activity restrained;
- Geographical area of restraint (must be reasonable to allow employees to earn a living post-employment);
- Duration of restraint (what is reasonable for your business);
- If your business is expanding, contemplate expansion in restraint or review regularly;
- Should be in ‘cascading’ form and contain a severance clause;
- Availability of legal advice and subject to negotiation (you should encourage the employee to seek legal advice before signing the contract to ensure they understand the legal implications of the restraint and its enforceable features);
- Rules of interpretation; and
- Notice periods (what might be reasonable for you to ensure you have adequate time to protect your interests at the separation of the employment relationship).
To make things crystal clear, you may even want to clearly articulate within the restraint clauses, what defines a competitor for the intent and purposes of the restraints being enforced.
As a small business employer, an employee jumping ship to a competitor or even an employee leaving your business to start their own because they think the grass is greener on the other side; can cause considerable damage to your business if you fail to protect or fail to respond promptly.
If you face these situations in your business, you need to act quickly as time in these situations, is of the essence. Where you think an employee may be at risk of or potentially has breached restraint, you can take one or a combination of the following immediate steps to protect your legitimate interests such as:
- Utilise the notice period available to you.
- If outlined in contractual documentation, enact your gardening leave clause whereby for all intents and purposes the employee is still employed by you for the duration of the notice period but is not required to attend the workplace. This allows you to take immediate steps to protect your client relationships prior to the cessation of the employment relationship.
- Conduct an investigation into the status of risk you face. This may include engaging a forensic IT Consultant to ascertain if information has been removed or deleted from your systems and to what extent.
- Have the employee sign an undertaking that they will abide by the restraint clauses in their contract.
- Seek an interlocutory injunction. An interlocutory injunction is a provisional order made at an earlier stage in the proceedings before the court has had the opportunity to assess the merits of the application.
While it pains me to say it, misplaced trust in your employer/employee relationship being strong during the employment period or trusting that an employee wouldn’t or couldn’t breach these obligations, is naïve. That might sound a bit harsh but personal experience has shown me otherwise so please take as many steps as you can to protect what you have legitimately worked hard for.
Action:
- Review the current restraint clauses you have regarding during and post-employment and make sure that they adequately protect your interests and that they are reasonable.
- Utilise cascading restraint clauses.
- Ensure that definitions used are only as broad as what is required to protect your interest.
- Review your policy on client data management and information maintained within your own systems.
- Don’t allow files to be saved externally or removed from site and regularly audit your client management systems to ensure that all appropriate information is on file where it should be such as contact persons, phone information and address details.
Contributing Source – Dianne Hollyoak (Partner), HWL Ebsworth Lawyers, March 2015.[/fusion_builder_column][/fusion_builder_row][/fusion_builder_container]
