What are post-employment restraints?
Post-employment restraints are provisions found in employment agreements which seek to restrict former employees following the termination of their employment, including their ability to commence employment with a competitor, solicit clients or poach employees of their former employer for a prescribed period of time and within a prescribed geographical location (Restraint Clauses). Restraint Clauses are designed to protect an employer’s ‘legitimate business interests’, which may include confidential information, client relationships and workforce stability, and should therefore be tailored to meet the specific needs of each employer.
There are three types of Restraint Clauses commonly found in employment contracts. These include:
- Non-compete clauses – This type of Restraint Clause inhibits a former employee from working for a competitor or starting a competing business, generally in the same industry or similar industry as the former employer.
- Non-solicitation clauses – This type of Restraint Clause prevents a former employee from poaching the clients, customers or suppliers of the former employer.
- Non-poaching clauses – This type of Restraint Clause prevents a former employee from poaching employees of the former employer.
Enforceability of Restraint Clauses
Restraint Clauses will only be enforceable by the Court if they are found to be reasonable, meaning that that are necessary to protect the legitimate business interests of the former employer. As such, legitimate business interests may encompass a range of different interests of the former employer, including but not limited to confidential information, trade secrets, client and customer relationships, goodwill and workforce stability. Further, where a Restraint Clause is not reasonably necessary to protect a legitimate business interest, and rather, serves to prevent competition or does not protect any real commercial interest, the Restraint Clause may be deemed unenforceable.
It is important to note that the enforceability of Restraint Clauses varies from state to state. In the State of New South Wales, Restraint Clauses are governed by dedicated legislation, being the Restraints of Trade Act 1976 (NSW) (the Act). In states other than NSW, however, Restraint Clauses are governed by the common law ‘blue pencil test’. These two approaches can have significantly different consequences. It is crucial, therefore, for both employees and employers to understand which approach will govern the enforceability of the Restraint Clauses contained in the relevant employment agreement, which will largely determine how the Restraint Clauses need to be drafted from the outset.
Enforceability of Restraint Clauses: NSW Approach
Unlike other Australian states, Restraint Clauses in NSW are governed by dedicated legislation, being the Act. In NSW, under the Act it is presumed that a Restraint Clause is reasonable and therefore enforceable. Further, the Court has the power to ‘read down’ or adjust the scope of a Restraint Clause. This means that even in instances where the Restraint Clause is too broad to be enforceable, the Court has the power to modify the obligations imposed by the Restraint Clause. This may include reducing the time period or the geographic scope of the Restraint Clause to make it reasonable and therefore enforceable.
Enforceability of Restraint Clauses: Other States’ Approach
In other Australian states, Restraint Clauses are not governed by legislation, but rather, by the common law ‘blue pencil’ test. Under this test, Restraint Clauses are presumed to be unenforceable unless it can be shown that they are reasonable. As such, the Court has the power to ‘strike out’ any unreasonable parts of the clause to make it enforceable. Unlike the NSW approach, however, the Courts cannot rewrite any aspect of the clause and may only redact what has already been contemplated by the parties. As such, where a Restraint Clause is modified by the Court, it will be enforceable only to the extent that the remaining unredacted aspects and obligations of the clause make legal sense on their own.
Important Considerations: Employees
It is important that employees understand their obligations with respect to Restraint Clauses, particularly in the context of starting a new role. Most Restraint Clauses will be drafted to apply during and after the termination of employment, so it is crucial that employees understand the scope of any potential obligations arising under their employment contract. By understanding the scope of any potential obligations, employees can avoid engaging in activities that may be in breach of the Restraint Clause. This is particularly relevant where an employee is seeking to accept a new role and is subject to a Restraint Clause by their former employee. In these circumstances, it is highly recommended that the employee seeks legal assistance to ensure they are acting in compliance with their obligations.
Important Considerations: Employers
To ensure that Restraint Clauses contained in employment contracts are drafted to be enforceable, it is important that they adequately and reasonable specify the restraint period, geographical scope, and restricted activities clearly and specifically. In assessing the reasonableness of the Restraint Clause, Courts are more likely to uphold clauses that are proportionate to the employee’s role, the extent of access to confidential information, and the potential harm to the former employer’s business. Overly broad or onerous restraints risk being considered unreasonable and therefore void.
In states other than NSW, to ensure that the clause is enforceable, Restraint Clauses in employment agreements often utilise ‘cascading’ clauses. As such, the Restraint Clause may be drafted to contain a long list of decreasing restraint periods and geographical scopes. This means that should the Court find that the highest (and most onerous) restraint is unreasonable, the subsequent lower level may still be valid. The Court can continuously reapply this approach and ‘strike out’ lines in a blue pencil in the list until the remaining restraint period and geographical scope is considered by the Court to be reasonable.
Despite these differing approaches, however, many employers in NSW still utilise the ‘cascading’ clause approach. This is particularly relevant and therefore recommended should an employer’s business operate across multiple Australian states.
Case Example: AEI Insurance Group v Martin (No 4) [2024] FCA 1110
In a recent Federal Court (the Court) decision, Craig Martin (Mr. Martin), a former Account Manager at AEI Insurance Group Pty Limited (AEI Insurance), was ordered to pay $500,000 in damages after soliciting clients to follow him to a direct competitor, MA Brokers (the Decision). The Court found that Mr. Martin had acted in breach of a 12-month post-employment restraint clause by directly or indirectly encouraging clients of AEI Insurance to move their business to MA Brokers. Ultimately, it was held by the Court that the Restraint Clause was reasonable given Mr. Martin’s extensive client relationships and senior, client-facing role in the business.
The Decision highlights the factors that will determine the ‘reasonableness’ and therefore enforceability of Restraint Clauses, including but not limited to the seniority of the relevant employee, including any access to confidential business information the employee may have had during their tenure, the nature of the employee’s role and the employer’s business, and the income of the employee. Read our detailed analysis of the Decision on our website here.
The Future of Non-Compete Clauses
The future of Non-Compete Clauses is subject to potential upcoming changes. In a recent legal development, the Federal Government is proposing a ‘blanket ban’ on Non-Compete Clauses for workers who earn below the High-Income Threshold, currently being $183,100 (the Proposed Ban). Should the Proposed Ban successfully pass through Parliament, it will take effect from 2027 and should override existing state-level practices, including the Act in NSW and the ‘blue pencil test’ in other Australian states. Read more about the Proposed Ban on our website here.
Need Assistance as an Employee or Employer with Restraint Clauses?
Restraint Clauses can have significant implications for both employers and employees. Seeking professional legal advice before drafting, negotiating or attempting to enforce Restraint Clauses is essential to ensure they are reasonable and therefore enforceable.
Our employment lawyers at Stevens’ & Associates Lawyers can provide expert guidance for both employers seeking to protect their legitimate business interests, and for employees aiming to understand their obligations arising from Restraint Clauses and seeking to manage any career transitions in light of any restraints. With experience across NSW and Australia, our team can assist you with ensuring compliance, mitigating any risks, and preventing and managing any disputes should they arise concerning Restraint Clauses.
Contact our team today to discuss your Restraint Clause concerns to receive tailored advice to safeguard your business or career.
