Restraints in employment contracts

Many prospective employees are given employment contracts which contain restraints against competition with their employer. Given that these are given at the outset of the employment relationship, the employee might not be thinking about what would potentially happen at its end, and not pay a great deal of attention to the restraints. This however can lead to issues at the ending of the employment.

Restraints against competition from employees are only valid to the extent to which they are reasonably necessary to protect the legitimate interests of the employer, assessed as at the time that the restraints were agreed to, but potentially having regard to planned expansion. Usually, this will involve protecting business intellectual property, and preserving the client relationship, for example restricting the employee from taking instructions from a client of the business with whom the employee dealt for a sufficient time to allow a replacement employee to form a relationship with the client.

Many restraint clauses however go much further than what is reasonably necessary. It is not uncommon for clauses to provide that the employee cannot work in that industry for a period of months to years, even if it is their profession. The clauses then set out different periods of restraint and different areas, with the intention that if one combination fails as it is excessive, then a lesser one might be valid.  Sometimes there will be dozens of potential combinations of time, area, and capacity.  There is also legislation in New South Wales allowing the courts to impose a lesser restraint.

The problem with this for employees is that they will not be sure what is or isnt valid until they are tested in court, at a cost of tens of thousands of dollars (money that the employer can afford but the employee might not) and potentially months or years of stress and risk.

Unfortunately, the unfair contracts legislation does not apply to employment contracts.  It is possible that if it did, the restraints in many employment contracts would be taken to be grossly excessive and unfair.  There is also nothing in the Fair Work Act to protect the employees against this situation, whether or not deliberately done by the employer.

As a result it is critical that any restraints in employment contracts are considered before they are signed, and that nothing is agreed to beyond what is reasonable.

For advice on restraints in employment, please contact Peter Muller at peterm@qbmlaw.com.au