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10 March 2009 8:42am

Employers compelled to make employees redundant because of the economic downturn are still entitled to enforce restraint clauses, says Minter Ellison Lawyers partner, Gareth Jolly.

As “a matter of principle” the economic climate or the financial condition of a business doesn’t make a difference to the legality of a restraint clause, Jolly told HR Daily. Restraint clauses, he says, are designed to protect an organisation’s customer connections or confidential information, and employers are at liberty to continue protecting themselves regardless of their capacity to provide employees with work.

According to Jolly, there are three main types of restraint clauses, all of which apply for a set period of time and are usually limited to a specific geographical location. These are:
1/ non-competition restraints, which prevent departing employees seeking or accepting work with industry competitors;

2/ non-solicitation of customers restraints, which (usually) allow departing employees to seek work with competitors, but prohibit them from soliciting the customers of their former employer; and

3/ non-solicitation of employees restraints, which prevent departing workers from headhunting their former employer’s talent.
Such clauses are generally stipulated in employment contracts or, on occasion, in deeds of release, Jolly says, and can be enforced – judicially, if need be – whether the employee is dismissed for disciplinary reasons, resigns or is made redundant.

“However, a restraint is only enforceable if the employer can prove it goes no further than necessary to protect the employer’s legitimate business interests, having regard to the activities restrained, the geographic scope and duration of the restraint,” he says.

“A restraint clause could also cease to be enforceable if the employer closed the relevant part of the business, essentially because the employer would no longer suffer any damage if the employee worked for a competitor or solicited customers,” Jolly says.

“However, this is not universally true and it will always depend on the particular circumstances of the case.”

Reasonable restraints
According to Thomson Playford Cutlers partner, Jacquie Seemann, employers – and courts – are more willing than ever to enforce restraint clauses, particularly with a growing awareness among employers of their right to do so.

However, there are “no black and white rules” when it comes to restraints, she says.

Restraint clauses are put in place, primarily, to protect confidential information and customer connections or relationships, and can be found invalid if they are utilised to prevent departing employees from competing for unreasonable extended periods or deny them the opportunity to make a living.

“It all comes down to what is reasonable in the circumstances,” Seemann says. “Is the employer seeking to protect a reasonable business interest in a reasonable fashion?”

For example, if a worker is made redundant or his or her employment is terminated for performance reasons the restraint will, most likely, only be considered reasonable if the worker is adequately compensated through past remuneration or the redundancy package.

In NSW, Seemann says, legislation allows the Supreme Court to “rewrite” a restraint and enforce the clause to the extent that it considers reasonable.

Two recent NSW cases
The NSW Supreme Court recently dismissed an application from information systems business, Sonnet Corporation Pty Ltd, to restrain its former chief operating officer from performing services with alleged competitor, People Telecom Ltd (PTL).

Sonnet, while conceding that the whole of its business was not competitive with the whole of PTL’s business, contended that certain aspects of the respective businesses were in competition, including the sector in which its former employee had been engaged.

However, Justice John Hamilton found that Sonnet’s contention was based on “hearsay or evidence of rumour as to what the [former employee] was doing” at PTL.

Further, evidence concerning the competitive nature of the respective businesses was “confusing and inconclusive”, Justice Hamilton found.

And in an unrelated case, the NSW Court of Appeal found that a 30-month restraint imposed on a former executive of a financial services firm was reasonable, in dismissing the executive’s appeal.

Justices David Hodgson, John Basten and Kenneth Handley found that the former Genesys Wealth Advisers Ltd employee could use the knowledge he had gathered after 20 years of service with Genesys to inflict serious commercial damage on the firm.

The executive had been issued an injunction in the Supreme Court after it was revealed he was soliciting Genesys’s financial planning members on behalf of another company.


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