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When is a restraint clause reasonable?
Wednesday, 19th November 2014, by Loran McDougall

In today's Workplace Bulletin:
  • Case Law: When is a restraint clause reasonable?
  • How to conduct an effective and fair workplace investigation
Dear Reader,
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:
  • the prohibited activity;
  • the geographical territory in which the activity is prohibited; and
  • the period of time after employment ceases in which the activity is prohibited.
A restraint clause is also required to be reasonable in its operation to be enforceable.
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,
Jessica Oldfield
Loran McDougall
Workplace Bulletin
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!
The issue of annual leave seems to raise a lot of questions, such as:
 How much annual leave can be carried over from one year to the next?
 Can we ask our employees to take their accrued paid annual leave?
 Can an employee ‘cash out’ their annual leave entitlements?
 If an employee gets sick during their annual leave, do we treat these days as personal or annual leave?
 Does an employee on long service leave accrue sick leave and annual leave while not in the workplace?
 Are casual employees entitled to annual leave?

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:
  • the employee’s knowledge of your business secrets or confidential information; and/or
  • the connection, influence or ‘sway’ the employee has over people who are valuable to your business, e.g. staff, suppliers, clients or those who refer business.
To maximise the prospects of a court upholding some form or restraint, lawyers typically draft restraint clauses that:
  • provide a number of different restraints, each based on a particular area, activity and restraint period;
  • state that the parties intend all of the restraints to operate simultaneously and separately from each other; and
  • state that if a court deems a restraint to be unreasonably broad and unenforceable, it falls away, leaving the other restraints (or, in reality, the next broadest restraint) to operate.
It’s a bit like peeling an onion!
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.

Charles Power
Charles Power

Employment Law Practical Handbook

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