Post-Employment Restraints Defences and Claims

Post-employment restraints are contractual provisions that restrict an employee from revealing confidential information, soliciting their former employer’s clients or employees, or otherwise harming that business. The Australian Bureau of Statistics found that in 2023, nearly half of all Australian businesses include some type of restraint clause in their employment contracts. However, despite their popularity, Australian courts have held that these restraint clauses are only binding when they are reasonable prohibitions to protect the employer’s legitimate business interests. This article looks at post-employment restraints, defences and claims. 

Post-employment restraints

Employment contracts commonly include clauses to protect an employer’s trade secrets and confidential information (non-disclosure), and clauses to protect the employer’s goodwill, customer relationships and staff (restraint of trade). These restraints are usually framed in terms of the:

• geographical location;
• duration;
• specific business types, industries or activities; and
• specific clients or customers that the employee cannot solicit.

Enforcing restraint clauses

When an employer finds that a former employee is breaching a post-employment restraint, they should immediately take legal action. If the matter is pressing, the employer should make a without-notice application to the court. Otherwise, the employer should have their solicitor send a letter to the former employee and if relevant, the new employer. The employer may be able to forego court proceedings and accept an undertaking from the former employee (and/or new employer) on terms similar to the potential outcome of court proceedings. Should this approach be unsuccessful, the employer may decide to commence a claim, including an application for interlocutory injunction to prevent further interference while the case is pending.

Defences against post-employment restraints

However, even if a former employee does breach a restraint clause, there are still strong defences that the employee can use if the former employer brings an action against them. When the courts consider the enforceability of a post-employment restraint, they weigh the following competing interests:

• the employer’s legitimate interest in protecting customer relationships, confidential information and other business interests;
• the employee’s right to earn a living using their education, experience and skills; and
• public policy including the public interest in fostering fair market competition.

Policymakers have expressed concern that post-employment restraint clauses can diminish job mobility and innovation, dampen entrepreneurialism, and reduce the number of available workers, especially in industries that experience acute skill shortages. There is also research that demonstrates that restraint clauses can actually result in lower wage growth for workers and reduce the bargaining power of workers in their employment (as they are usually prohibited from moving to local employers performing similar work).

Certainly, the courts will not enforce a restraint clause that aims to stifle market competition. The employer must be able to point to a specific business interest that requires the protection of a restraint clause. In most cases, the courts will void a restraint clause unless the employer can demonstrate that the clause protects a legitimate interest, the scope of the clause is reasonable, and enforcement of the clause is not contrary to the public interest.

Reasonableness of scope

Even when an employer can identify a legitimate interest to protect, a former employee can still argue that the scope of the restraint exceeds what is reasonable to protect the identified interest of the employer. Reasonableness is determined with reference to the scope of the restraint, the nature of the prohibited activities, and the length and geographical area of restraint. The courts assesses these issues according to how reasonable the restraint was at the time the parties entered into the contract. The courts takes a broad and common-sense view of the circumstances, particularly in relation to the duration of the restraint.

Other voidable constraints

A post-employment restraint is also not enforceable when an employer’s own wrongful conduct leads to the employee’s termination. For instance, a wrongful dismissal voids all post-employment obligations under an employment contract, including a restraint. As far back as 1914, the High Court held in Kaufman v McGillicuddy that a dentist was not bound by a post-employment restraint after he resigned following an unprovoked assault from a colleague and the dissolution of the partnership.

Post-employment restraint clauses are also not enforceable when the employer engages in repudiatory conduct, and the employee accepts this conduct as bringing the employment relationship to an end. Even when the contract states that a restraint survives any kind of termination of employment, in practice the post-employment restraint is likely to be unenforceable in such cases.

Developing a post-employment restraint claim or defence can be a complicated process. Whether the restraint is valid and enforceable typically depends on the circumstances of the case and the scope of the restraint. The employment law team at Go To Court Lawyers can provide advice and representation on this and any other employment law matter. Please contact our team on 1300 636 846.