Updated: Oct 28, 2021
Photo Courtesy: Paul Pan collected from Unsplash
These days’ businesses often add restrictive clauses in the employment contract when they are hiring employees. However, most of us do not clearly understand what these restrictive clauses are and how we can use those. The purpose of an employment contract is to define the rights and obligations of both the employer and the employees. Restrictive clauses are one of such categories of rights where the employer can restraint the employee to perform certain acts for a certain period even after they leave the employment. In this article, I will try to address the questions around the restrictive clauses and the extent of their enforceability.
1. What is a Restrictive Clause or Restraint Covenant in an employment contract?
A restrictive clause or restraint covenant prevents an ex-employee from working for a competitor of the employer in any capacity for a specified period. It is also known as the restraint of trade clause. A restrictive covenant is a specific agreement that the employee will not disclose confidential or valuable information obtained in their employment.
Restrictive clauses are designed to protect the information that the employees access during their employment. When employees leave their employment for whatever reason, they should be extremely mindful that they do not retain any of their former employer’s confidential information. This includes financial information, client lists, trade secrets and intellectual property. If an employer has evidence that an employee has taken confidential information, they can commence proceedings against the employee, seeking various forms of relief including damages and costs.
Other restrictions may also be included, such as not soliciting a former employer's clients, customers or staff, and not using a former employer's confidential information.
2. What are different kinds of restrictive clauses that can be included in an employment contract?
Employers can use quite a few kinds of restrictive covenants in employment contracts to protect their businesses. Some of the variations of restrictive clauses are following:
Non-Competition Covenants – It restricts the former employee from working in similar employment for a competitor of the employer for a certain time;
Non-Solicitation Covenants – It prevents the employee from poaching clients or customers or suppliers of the former employer for a specific period;
Non-Dealing Covenants – It prevents a former employee from dealing with former clients or customers or suppliers for a specific period, regardless of which party approached the other;
Non-Poaching Covenants – It prevents an employee from poaching former colleagues.
Confidential Information Covenant- It is also called the non-disclosure covenant. It prohibits the disclosure of certain information by the former employee. This may include:
Plans, projects and inventions,
Garden Leave - Garden leave is also commonly used in conjunction with restrictive covenants for maximum effect. A garden leave clause in a contract of employment allows an employer to require the employee to spend all or part of the notice period at home whilst continuing to receive his usual salary and benefits.
The purpose of a garden leave clause is to prevent the employee from taking up other employment with a competitor. It enables the employee's successor to establish himself and develop relationships with the employee's customers and contacts. The employee in garden leave does not have access to the company's confidential information. By the time leaves finish, the information they had would become out of date.
3. When does a restrictive clause become ineffective?
Restrictive clauses are operative for a specific period as mentioned in the employment agreement. It becomes unenforceable after such a period.
For a restrictive covenant to be enforceable it must be drafted precisely. The restrictions must be imposed for an unreasonable time. If the clause is challenged, the employer will have to show that the clause is justified and sufficiently narrow. If a restrictive clause is not justified, it comes unenforceable.
An employer must consider the following factors to have an effective restrictive clause:
The geographical area in which the restriction is enforceable must be of a justifiable breadth. If you want to include a vast area where the former employee will be unable to take up a job, your ability to enforce the clause becomes unlikely.
The length of time of the post-termination restriction must be justified. If you impose a restriction on the former employee for more than 6-12 months will be difficult to justify.
As an employer, you must be able to justify the breadth of the activities of the former employee that you are trying to restrict.
While putting on a restrictive clause you must consider the type of interest being protected. For instance, information such as trade secrets may be granted wider protection than customer information as its potential use across markets is wider.
As an employer, you may also be required to show evidence of the connection between the employee and any information that is being protected.
Therefore, the extent of a restrictive clause depends on the employee's position within your business. Senior employees who have access to more sensitive information about your business may have justifiable higher restrictions. However, a one-size-fits-all policy on restrictive clauses risks the clause becoming unenforceable. To make sure that the restrictive clause is enforceable, you should get the legal experts to draft the contracts. You may also need to review the existing restrictive clauses periodically. Those clauses are enforceable only if they are reasonable. The reasonableness of the restrictive clause is determined at the time it was entered into. While determining the reasonableness of the restrictive clause, the court may have regard to the standard practice in the employer’s industry.
4. What are the remedies you can have for the breach of a restrictive covenant?
An employer can seek the following remedies for the breach of a restrictive covenant.
Injunction- As an employer, if you have reason to believe that an employee has breached the post-termination restriction, you may ask for an injunction in court. The court may grant the injunction application and order the employee to "deliver up" or destroy confidential information. This means that the court will be asked to stop the employee immediately from beaching the restrictive clause and hear the full evidence later in another trial.
Damages from the Employee- You can also claim a financial remedy or damages for breach of a restrictive covenant. However, as the employer, you will need to show some loss resulting from the breach. This will normally be a loss of profit on contracts or opportunities diverted by the employee.
Damages from the competitor- if your employee has been induced by your competitor into breaching restrictive covenants, you might choose to sue that competitor as the employer of your breaching employee. You may choose this option as the competitor company is likely to have more financial resources to pay any award of damages made.
To conclude, we must remember that just because an employment contract contains a restrictive covenant, does not mean that it is legally enforceable. Enforceability of the clause depends on the reasonableness of the restrictions it imposes. If you need help with your employment contract or want any legal advice please feel free to contact us at www.lawcircuit.com.au or email us at firstname.lastname@example.org or call us at 0418631798. We will connect you to the best legal services in Melbourne. We are here to make your legal journey easier.