Post-Employment Restraints: What is Reasonable? – Employee Rights/ Labour Relations

In a recent case the NSW Court of Appeal (the
“Court of Appeal“), considered the issue
of whether the post-employment restraints of a senior manager and
his more junior employee were reasonable. The post-employment
restraints prevented the employees from joining a competitor.

The case was an appeal from the NSW Supreme Court which found
that the post-employment restraints enforced by the employer,
Employsure, upon the senior manager and junior employee, were
reasonable and should apply for nine months.

You can read about the key principles of post-employment
restraints in our article here.

The principle of “reasonableness” relates to whether
the terms of the restraint are reasonable to protect the legitimate
business interests of an organisation. This case explored the
application of this principle in respect of two employees with
disparate levels of seniority.

The Court of Appeal noted that the need for post-employment
restraints arises because of the difficulty of restricting
employees from utilising information, which may be confidential,
but is nevertheless stored in their minds from their experience of
working with their employer. Therefore, confidentiality obligations
will not sufficiently protect an organisation from such information
being used by a competitor employing their former employee, and the
only protection is to prevent former employees from commencing
employment with a competitor for a certain period of time.

The senior manager’s restraint

The senior manager’s employment contract included
confidentiality obligations and a cascading post-employment
restraint that he would not be engaged in a business in competition
with Employsure for a period of 12, 9, 6, or 3 months. In the
initial decision the NSW Supreme Court found that the restraint
could be enforced for a period of nine months following the
termination of the senior manager’s employment.

In considering whether the senior manager’s nine-month
post-employment restraint was reasonable, the Court of Appeal
considered the following issues:

• whether the organisation had a legitimate protectable interest;
  and




• whether the restraint was no more than reasonable for the
  legitimate protection of that interest.

The Court of Appeal found that the senior manager:

• held a senior role as Outbound Sales Manager which led him to
  become privy to Employsure’s strategic vision;




• had attended senior management team meetings and received
  materials that were highly confidential in relation to all aspects
  of Employsure’s business;




• must have gained intimate knowledge of Employsure’s
  strategic strengths and weaknesses; and




• was exposed to confidential information that could be used to
  the detriment of Employsure. This was particularly relevant given
  the senior manager’s new employer, ELMO, was a competitor of
  Employsure.

The Court of Appeal found that ELMO was a competitor of
Employsure at the time the employment was terminated and Employsure
had a legitimate protectable interest. The nine-month
post-employment restraint of the senior manager was no more than
reasonably necessary and was upheld.

The junior employee’s post-employment restraint

The Court of Appeal also considered whether the junior
employee’s nine-month post-employment restraint was reasonable
and valid.

The Court of Appeal addressed the same issues as above in
relation to the senior manager’s post-employment restraint.
However, it found that the junior employee’s lack of seniority
within Employsure was relevant in assessing the reasonableness of
the restraint, particularly the duration.

The Court of Appeal found that the junior employee’s memory
of confidential information would likely be short-lived,
considering his low-level position. Accordingly, the Court of
Appeal found that the post-employment restraint of the junior
employee was not reasonable.

Because the restraint was drafted as a cascading restraint
(meaning the duration of the restraint was not set, but rather,
could be enforced for a period of 12, 9, 6 or 3 months), the Court
of Appeal could have considered whether a shorter post-employment
restraint was reasonable. However, this was not explored as
Employsure did not press for this during the hearing.

Key takeaways

Post-employment restraints of trade are important contractual
tools to protect the legitimate business interests of
organisations. As the above case demonstrates, a “one size
fits all” approach cannot be adopted and restraints need to be
drafted carefully based on the specific requirements of an
organisation and the individual circumstances of an employee,
including their seniority.

Restraints must be drafted with enforceability in mind and
should be reviewed regularly, particularly where an employee is
promoted or there are other contractual variations.