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Enforcing post-employment restraints

Post-employment restraints can be used to restrict an employee from competing with the employer after the termination of their employment. A post-employment restraint is only enforceable if it is reasonable as between the parties.

Jewlia Holt
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When considering whether to enforce a post-employment restraint, the courts will weigh up a number of competing interests including:

  • the employer’s interests in protecting its confidential information, customer connections and other legitimate business interests;
  • the employee’s ability to earn a living using his or her skills, experience and know-how; and
  • the public interest in freedom of trade and competition.
  • Generally, the courts will find a post-employment restraint reasonable if it was imposed to protect the legitimate interest of the employer and does no more than reasonably necessary to protect that interest, in terms of its duration or extent.

It is well established that employers have a legitimate interest in protecting confidential information, trade secrets and customer or client connections. This includes restraining an employee from being involved with a competitive business that could use its confidential information.

However, a post-employment clause is unenforceable if the employment contract ended because of the employer’s breach or repudiation.

In Liberty Financial Pty Ltd v Jugovic [2021] FCA 607, a long standing executive employee resigned to work in a competitor’s start-up business in an almost identical role.

His employer sought to enforce the post-employment restraint contained in his employment contract to protect its confidential information, being the insider knowledge the employee acquired over his long tenure including detailed knowledge of the employer’s clients. The Court agreed this was a legitimate interest to protect.

The Court also agreed the restraint did no more than reasonably necessary to protect this interest, as it only prohibited the employee from providing ‘services which are the same or similar to those’ he provided his employer in the last 12 months of his employment.

The employee then tried to argue the employer repudiated the employment contract after having failed to make payments on termination and that accordingly, the restraint was unenforceable.

The Court rejected this argument given its timing (during the proceeding) appeared ingenuine and contrived to avoid compliance with the restraint. The Court confirmed the employment agreement came to an end on resignation, that relevant entitlements only accrue on termination and any delay in payment is unlikely to amount to an act of repudiation.

Lessons

  • There is a difference between protecting a business against mere competition and protecting a business against the use of its confidential information or solicitation of its customers or clients. The former is not a legitimate interest which can be protected via a post-employment, the latter is.
  • A post-employment restraint is not enforceable where an employer’s own wrongful conduct has led to the termination of the employment. For example, a wrongful dismissal, and its acceptance by the employee as terminating the contract, will put an end to any post-employment restraint, as well as to any other obligations in the employment contract.
  • In the same way, a post-employment restraint is not enforceable where the employee has engaged in repudiatory conduct and that conduct has been accepted by the employee as bringing the employment relationship to an end. Even where the contract provides that a restraint shall survive termination of employment in any circumstances and for any reason, the authorities suggest that termination of employment by the employer’s repudiatory conduct will render all post-employment restraints unenforceable (see Crowe Horwath (Aust) Pty Ltd v Loone [2017] VSCA 181).
  • However, any attempt to contrive an argument of repudiation for the purposes of avoiding compliance with a post-employment restraint will not work and will be frowned upon by a Court.
Jewlia Holt
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