Across the world, a number of jurisdictions have outlawed the use of certain types of restraint clauses (such as the US Federal Trade Commission banning the use of all encompassing “non-compete” clauses nationwide). We’re starting to see a similar sentiment take hold in Australia – restraints are becoming much more heavily scrutinised by both the courts and the government, reflecting that the tide may be changing (you can hear more about that in our Podcast episode (available here).
So, when and why should your business be using restraint clauses?
We take a look at some recent Australian decisions that illustrate the evolving legal landscape and its implications for your contract practices.
A quick refresher…
Employment contracts often include clauses that restrict an employee’s actions even after their employment has ended. As a quick refresher, the “family” of restraint clauses include:
- Non-compete restraints which bar the employee from working with or being involved in a competing business.
- Confidentiality restraints that prohibit disclosing employer’s secrets.
- Non-solicitation restraints that prevent soliciting employer’s clients.
- Non-dealing restraints that forbid providing services to those clients.
- Non-recruitment restraints that stop the employee from encouraging colleagues to leave the company.
The Debate
In Australia, we’re seeing restraint clauses face increasing scrutiny for their negative impact on both individual employees and the broader economy. See for example, a recent FWC decision, Andrew Goddard v Richtek Melbourne Pty Ltd [1] where the Fair Work Commission criticised the non-compete clause as overly restrictive when considering whether a dismissed employee had done all they could to mitigate their loss in assessing compensation for an unfair dismissal.
Deputy President Colman mused that it was unclear why restraints are common in the contracts of ‘ordinary workers’ and that the presence of such a clause (despite its likely unenforceability) explained why the employee, a grouting and grouting services salesperson, hadn’t tried to find another job in his sector in the 12 months after his dismissal.
Lochdyl Pty Ltd v Lind [2] strikes a similar chord, with the Magistrates Court of South Australia declaring a non-solicitation restraint clause void, due to its excessive restrictiveness. The employee in question was a hairdresser and the restraint in her contract tried to impose a two-year restriction on the employee diverting or attempting to divert from any business she had enjoyed, solicited or attempted to solicit from customers prior to the termination of her employment. Magistrate Vozzo determined that the restraint’s duration and scope were significantly more than what was reasonably necessary, as the nature of the hairdressing business allowed for the quick establishment of new customer relationships. This implied that any reasonable restraint would need to involve a shorter time period during which a hairdresser should be restrained from soliciting or attempting to solicit business. Consequently, the two-year restraint was deemed excessive and unenforceable. Additionally, Magistrate Vozzo found that the clause in question was ambiguously worded, lacking clarity in key terms, further contributing to its unenforceability.
Finally, Justice Parker in Scyne Advisory Business Services Pty Ltd v Heaney [3] refused to grant an interlocutory injunction based on procedural grounds. Justice Parker found that, despite considering there was a serious question to be determined about the enforceability of the restraint, which would support granting a temporary non-compete restraint, Scyne’s significant delays in its attempt to enforcement the restraint meant that it would be unreasonable to restraint the ex-employee and prevent them from working while the case was heard. The decision signals to employers the critical need for timely action when seeking to enforce restraint clauses.
This isn’t to say that post-employment restraints are never being enforced – Samsung Electronics Australia Pty Ltd v Grenville[4] is a recent example of a court temporarily enforcing a non-compete and a non-solicit restraint while the case was being heard by the Court. The Court found that it was arguable that the restraint was necessary to protect Samsung’s confidential information and customer connections and ordered the temporary restrictions last for at least three months while the case was heard. In this case, Samsung also gave an undertaking that during this time the ex-employee’s old base salary would continue to be paid to him to mitigate his loss.
Key observations
Restraint clauses are important for ‘worst case’ scenarios – you know, like where an employee sends 10,000 work emails to their personal Hotmail account on their last day, or where a key senior executive immediately starts at your no. 1 competitor. However, while restraint clauses can serve as a tool for employers, they must be carefully crafted to ensure they are reasonable in scope and duration.
Pursuing excessive restraints that will likely be deemed unenforceable is not a good use of anyone’s time or resources. Excessive restraints are bad for employees, bad for the economy and thus bad for employers.
As employers, you should always consider whether the inclusion of a restraint clause is truly necessary. Thoughtfully crafted restraint clauses not only enhance their legal enforceability but also promote a fairer and more dynamic labour market, benefiting both businesses and employees.
Takeaways
- Courts are adopting a stricter stance: Excessive or unwarranted restraint clauses are increasingly likely to be deemed unenforceable. Ensure your restraints are reasonable and justifiable.
- Tailor restraint clauses to individual circumstances: Avoid using a one-size-fits-all approach. Consider the specific role, industry, and potential impact on the employee’s reasonable ability to practice their profession when drafting a restraint.
- Focus on legitimate business interests: Restraint clauses should be proportionate and necessary, aimed solely at protecting genuine business interests such as your confidential information and customer relationships.
- Review restraint clauses upon dismissal: Evaluate whether enforcing a restraint clause is appropriate when an employee leaves. In some cases, negotiating the application of the restraint, or parts of it, might be the better course of action.
[1] [2024] FWC 979
[2] [2024] SAMC 43
[3] [2024] NSWSC 275
[4] [2024] NSWSC 608
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The views expressed in this article are general in nature only and do not constitute legal advice.
Please do not hesitate to contact us if you require specific advice tailored to the needs of your organisation in relation to the implications of these changes for your organisation.