When is a restraint clause reasonable?
Wednesday, 19th November 2014, by Loran McDougall
In today's Workplace Bulletin:
A post-employment restraint clause in an employment contract seeks to restrict the activities of an employee after they leave their employment.
Typically, a restraint clause needs the following things to be clearly specified in the clause in order to operate effectively:
It sounds simple, but the way lawyers draft restraint clauses, and the way a court determines whether or not a restraint is reasonable can be less straightforward.
With the help of a recent case law, Charles Power explains in today’s bulletin.
Until next time,
P.S. In the coming weeks, we’ll be launching an important new guide to help you conduct an effective and fair workplace investigation.
The aim of this resource is to provide clear and practical guidelines to help you resolve a variety of potential workplace conflicts and complaints and achieve the best possible outcome for your business and your staff. We’ll keep you posted!
Case Law: When is a restraint clause
by Charles Power
Editor-in-Chief, Employment Law Practical Handbook
Even when the required information (i.e. the what, when and where of the prohibited activity) is clearly specified in a restraint clause, a court may rule the restraint is unreasonable because it goes beyond what is a reasonable protection for the legitimate business interests of the employer.
Generally, legitimate business interests justifying restraints are:
However, some judges have expressed doubts as to whether this "cascading drafting" actually provides the required certainty. This is because the clause does not actually let an employee know the requirements they are bound by. The employee sees a whole lot of apparently inconsistent restraints and has no idea which one applies. In effect, the scope of the restraint is left to the court.
However, in Bulk Frozen Foods Pty Ltd v Excell (2014), Blow CJ of the Supreme Court of Tasmania held that a restraint clause – which, taking into account every possible permutation, included 8,190 separate covenants – was not uncertain or unreasonable. The effect of these restraints was to prevent the former employee from working in any capacity with a competitor of Bulk Frozen Foods Pty Ltd throughout Tasmania for a period of 6 months.
In this case, the former employee was a general manager of the wholesale and retail operations in Tasmania. He had knowledge of information regarding his employer’s customers, profit margins, price lists, wages, employee conditions, and the prices paid for merchandise after deals, rebates and discounts. This information was able to be protected by means of a reasonable and valid restraint clause.
Employment Law Practical Handbook
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