Clients and information should be thought of as assets worth insuring. We may be seeing the last years of contractual non compete clauses but that doesn’t mean contractual post employment restraints don’t have a role to play. They’re not perfect but, like democracy, they beat the alternatives. Consider this scenario. A business has trained up a bright young employee who was going to stay for many years and that employee has built a relationship with some of the best clients. Out of the blue, the employee resigns and you, the business owner, stop hearing from those clients. You later find they have given their business to your old employee, who is either with a new employer (your competitor), or has set up their own business. If you don’t have a contractual restraint, then there may not be much you can do about this.
Care needs to be taken however. Courts will enforce post employment restraints but only where they are clear and only so far as necessary to protect the employer’s reasonable business interests. At the outset, you should consider whether a restraint clause is simply intended to be a deterrent or whether it should be capable of being enforced by a court. Sometimes a nasty letter from the business or its lawyers may be enough for the employee to take fright. But it may not, and you may then need to decide whether to escalate with court action or not. Legal action will usually take the form of a claim for monetary damages for breach of contract and/or an application for an injunction to stop the former employee from continuing to breach their contract, usually in the District or Supreme Court. These are not small matters.
If the business is losing clients, then it may be injunction time. An injunction is a discretionary remedy, and even more so on an interim basis when the court does not have the benefit of a full hearing and evidence. Court applications involve significant time, expense, uncertainty and are a distraction from running a business. So it pays to get the drafting right to begin with. A contractual employment restraint normally comprises several types of restraint and time qualifiers (called “cascading” or “ladder” clauses) on the operation of the restraint (and sometimes a geographic restraint). The purpose is to allow a judge to select a suitable combination as courts in Queensland will not re write restraints. Restraints on employees generally take 3 main forms:
1. A restraint from poaching other employees;
2. A restraint from poaching or accepting the business of clients (usually restricted to clients who the employee had dealings with); and
3. A restraint from misusing confidential information gained during the employment (which does not have to be time limited).
Broad non competes will generally only be of deterrent value and only likely to have application to the most senior and long serving employees. A middle of the road approach would see an anti competition restraint restricted to those clients, potential clients and referrers of work with whom the employee has had dealings in the 12 month period before termination of the employment for a period of up to 6 months. This type of restraint may cover any action by an ex employee to persuade, solicit or even accept an approach by a relevant client, potential client or referrer. Confidentiality clauses can also play a supporting role. Practical issues to consider when drafting a suitable restraint include:
1. What is the nature and extent of unfair advantage likely to be gained by the employee?
2. What level of protection does the employer need and for how long?
3. What is the type and seniority of the position and its salary level?
4. To what extent is the person the “face” of the business?
5. What is an appropriate notice of termination period and to what extent can a “quasi” restraint be obtained through “gardening leave”?
The reality is that taking court action is often a case of shutting the gate after the horse has bolted. Apart from ensuring the restraint provision is reasonable, employers should:
1. Explain the contractual restraint to employees before they start work, the reasons for the restraint and make note of or obtain the employee’s acknowledgement of the discussion;
2. Keep in touch with important clients and referrers and remain “the face” of the business;
3. Ensure no one person has sole contact with or relationship responsibility for a client;
4. Control the types of confidential information that are coming into employees’ hands during their employment. This may include client lists, information about client needs, pricing and marketing strategies, secret processes and specialist “know how”;
5. Review the restraint as the employment goes on and ensure it remains appropriate (although this may involve negotiation with the employee involved);
6. Remind departing employees of their restraint;
7. If an employee resigns, consider not paying them in lieu of notice. Either the employee works out their notice period and joint approaches are made to clients to advise of transitional arrangements, or consider putting the employee on “garden leave” for their notice period and use the time to contact clients; and
8. If all else fails, consider a commercial approach of allowing the employee to take clients in return for a monetary payment.
Please contact us if you would like any further information or help.