Hold the Line! - Restraints & Employment Contracts
Workplace Law's Managing Director, Athena Koelmeyer, will guide you through the legal minefield of post-employment restraints.
Read more...It is not common for employment contracts to contain restraint of trade clauses which seek to prevent departing employees from joining competitors or using or disclosing their former employer’s confidential information.
Enforcement of such clauses is often through the courts who will determine whether they are reasonable to protect the employer’s legitimate business interests. In United Petroleum Pty Ltd v Barrie [2022] FCA 818, the Federal Court of Australia declined to grant an application for an interim injunction seeking to prevent employee from joining a competitor on the basis the restraints were greater than what was necessary to protect the employer’s commercial interests.
Mr Barrie (the Employee) was employed by United Petroleum Pty Ltd (UP) in the position of Business Development Manager. UP operates a wholesale and retail fuel supply business.
In December 2021, the Employee resigned from UP and was to commence employment with another petroleum distribution and supply business, IOR Services Pty Ltd (IOR) in the position of Sales Manager, Aviation. IOR also operates in the fuel supply sector.
The Employee’s employment contract with UP contained post-employment restraints in which the Employee agreed not to during the restraint period and in the restraint area:
- be engaged, involved or materially interested in any activity for or on behalf of a business, firm or undertaking of substantially the same kind as he performed during his employment with UP, in which use or disclosure of confidential information may be useful or advantageous to the business, firm, undertaking or to him; and
- carry on, advise, provide services to or be engaged, concerned or interested in or associated with or otherwise involved in any business activity that is competitive with any business carried on by UP.
The restraints period and restraint area had cascading provisions which reduced the length of time and area in which the restraints were to apply.
In January 2022, UP made an interlocutory application seeking an injunction against the Employee to enforce the post-employment restraints and to restrain the employee from breaching his duties under section 183 of the Corporations Act 2001 (Cth) (Corporations Act). As the employee provided undertakings to UP that he would not commence employment with IOR, the matter was adjourned until March 2022.
The interlocutory application came before Justice Snaden who refused to grant an injunction and dismissed UP’s application on the basis that both restraints extended beyond what was necessary to protect UP’s legitimate commercial interests.
In relation to (1), Justice Snaden noted that the clause was concerned with the advantage which might be obtained from possessing confidential information and sought to stop the employee from taking on roles whether or not the Employee was actually in possession of advantageous of confidential information. He considered that the clause in effect operated to restrict the Employee from taking on roles even where it would not put in jeopardy UP’s legitimate commercial interests. Accordingly, Justice Snaden found that the clause went beyond a legitimate and enforceable restraint.
Similarly in relation to (2) Justice Snaden considered the restraint to be too wide as it operated to restrain the Employee from being concerned or interested in any activity which was in competition with UP rather than protecting the legitimate commercial interests of UP. Again, Justice Snaden noted that this clause would restrict activities irrespective of whether it could cause harm to UP’s commercial interests and would mean that the Employee would be prevented from being employed in a role which was different to that which he performed with UP.
While Justice Snaden accepted that UP had established a case in relation to the duty not to improperly use information under the Corporations Act, he considered it to be weak.
Justice Snaden was also not satisfied that the balance of convenience favoured granting the interim injunction.
He noted that the injunction would have only stopped the Employee from commencing employment with IOR for another month and considered it “inherently unlikely” that the employee would be able to engage in conduct in that period which would adversely affect UP. Justice Snaden also took into consideration the Employee’s economic hardship, particularly he had given an undertaking not to start in his new role until the interlocutory application had been dealt with.
Lessons for employers
Generally, restraint of trade clauses are presumptively void and will only be enforceable where the obligations are reasonable between the parties and not against the public interest. The Courts will take into account the employee’s position, status, duties, access and possession of confidential information as well as the length and area in which the restraint is to apply. For this reason, post-employment restraints must be carefully drafted so that they do not go beyond what is reasonably necessary to protect the employer’s legitimate commercial interests.
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