A recent decision of the Federal Court serves as a timely reminder to ensure that post-employment restraint clauses in contracts of employment are well drafted and appropriate to each employment circumstance.
In the decision of United Petroleum Pty Ltd v Barrie [2022] FCA 818, the Court declined to make orders enforcing a post-employment non-compete clause on a temporary basis because the clauses of the employment contract imposed greater restrictions than appeared necessary to protect United Petroleum’s business.
Are post-employment restraints enforceable?
The starting point for post-employment restraints is that they are presumed void, or unenforceable unless an employer can show that, in the particular circumstances of an employee, the restrictions are reasonable, are necessary to protect a legitimate business interest of the employer and are not against the public interest, including the public interest in not preventing an individual from earning an income.
What was United Petroleum’s application?
United Petroleum had approached the Court seeking interlocutory, or temporary, orders preventing their former Queensland Wholesale State Manager from commencing employment with IOR Services Pty Ltd, a business operating in the petroleum products sector. The temporary orders where being sought until the Court could properly hear an application to enforce the post-employment restraints to their full extent.
The employment contract in question contained post-employment restraints in which the employee had agreed not to:
‘(a) be engaged, involved or materially interested in any activity for or on behalf of a business, firm or undertaking of substantially the same kind as [he] performed during [his] employment with [United Petroleum], in which use or disclosure of confidential information may be useful or advantageous to the business, firm, undertaking or to [him];
…[and]
(e) carry on, advise, provide services to or be engaged, concerned or interested in or associated with or otherwise involved in any business activity that is competitive with any business carried on by [United Petroleum].’
Was there a legitimate business interest to protect?
In considering whether those restrictions were reasonable and necessary to protect a legitimate business interest of the United Petroleum, the Court ultimately found that the post-employment restraints went beyond what was necessary to protect its legitimate commercial interests.
The Court said that the post-employment obligations were drafted so that it did not matter whether the employee actually had possession of confidential information belonging to United Petroleum, whether taking up another role would jeopardise any legitimate commercial interest that the applicant might wish to protect, or whether the activities the clauses sought to restrict would have the capacity to inflict harm on United Petroleum. There was some consideration as to whether the post-employment restraints could be read down (or narrowed) to make the clause enforceable; however, the Court found that it was not possible to do so in a way that preserved only a necessary application of the obligations.[1]
Against the interests of United Petroleum, the Court was required to balance the interests of the employee, and in particular what harm the employee might suffer if the post-employment restraints were enforced temporarily to prevent the employee from taking up his new position.
Having undertaken not to until the application for interlocutory relief was decided, the respondent had been unable to work in his new role for several months. His evidence was to the effect that that inability posed predictable economic hardship for him and his family. That hardship very much tended against the appropriateness of interim relief.
Ultimately, the Court was not satisfied that the post-employment restraints needed to be enforced on a temporary basis until it could decide finally because it was not satisfied that the restraints were necessary to protect United Petroleum’s legitimate business interests.
Key takeaways
Whether a non-compete restraint is enforceable will always turn on the relevant facts. Post-employment restraint clauses should always be drafted having regard to an individual employee’s position within the business.
Factors that weigh in favour of enforceability include but are not limited to:
- Seniority of the former employee and position within the corporate structure;
- The access that an employee had to confidential information that, if in the hands of a competitor, could cause damage to the business;
- Knowledge of client relationships, techniques and resources used by the company to sell or market its goods or services to customers and retain customers;
- Responsibilities of the former employee which may include responsibility for bringing in new clients to the business;
- The restraint period and geographical area are reasonably necessary to protect the business’ legitimate commercial interests.
Next steps for employers
- Review current post-employment restraint clauses and think critically about whether they impose reasonable restrictions particularly in relation to non-compete clauses.
- Draft post-employment restraints to apply to the extent the individual can actually harm the legitimate business interests of the employer.
- Ensure that the post-employment restraint is appropriate for the employee’s position within your business, the confidential information they have access to, and the relationships with customers, clients, and suppliers they have cultivated on behalf of your business.
[1] Note: the Restraint of Trades Act 1976 (NSW) which applies in NSW only, allows the Supreme Court of NSW to order that a restraint is valid in a way that the Court thinks fit and appropriate to the circumstances. There is no equivalent legislation in Qld, any other State, or federally.