Restraint clauses in employment agreements
I often have companies approaching me with concerns about restraint clauses in employment agreements—seeking clarity on what they can and cannot do. These clauses, which are commonly used to protect legitimate business interests, are far from straightforward. Understanding their implications is essential for both employers and employees. Beyond restraint clauses like non-compete or non-solicitation provisions, there are also confidentiality obligations, which are enforceable indefinitely and apply to everyone.
To help you navigate these complexities, here’s some legal information to ensure you’re informed about your obligations, whether you’re leaving an employer or enforcing these terms.
1. NSW Legal Context for Restraint Clauses
Under NSW law, restraint clauses are enforceable only to the extent that they are reasonable and necessary to protect the legitimate business interests of the former employer. Courts will consider:
The duration of the restraint (e.g., 6 months).
The geographical scope (e.g., NSW or Sydney).
The type of restraint (e.g., non-compete or non-solicitation).
Courts in NSW tend to enforce non-solicitation clauses more readily than non-compete clauses. However, even non-solicitation clauses must be limited in time, scope, and purpose to be deemed reasonable.
1.1 Key Restraint Clauses Relevant to NSW Laws
Given the jurisdiction of NSW, the following restraint clauses in the agreement are most likely to be enforceable:
1.1.1 Non-Solicitation of Clients (6 Months)
NSW courts are more likely to enforce a 6-month non-solicitation clause limited to clients the Individual dealt with during their previous employment (emphasis added).
1.1.2 Non-Solicitation of Employees (12 Months)
A 12-month non-solicitation clause preventing the Individual from poaching former colleagues is also likely to be upheld, especially if the Individual had direct contact with those employees.
1.1.3 Confidentiality Obligations
Confidentiality clauses are indefinitely enforceable (emphasis added) and must be strictly adhered to. The Individual must not disclose or use any confidential information obtained from their former employer.
2. Legal Definition of Solicitation in NSW Employment Law
The concept of solicitation is critical in understanding the Individual’s obligations. Under NSW law, solicitation involves taking active steps to persuade or encourage a client, customer, or employee to change their business dealings or employment relationship.
2.1 Key Legal Points About Solicitation
2.1.1 Active conduct is required: Solicitation involves positive actions to engage or encourage someone to move their business or employment.
2.1.2 Passive receipt of inquiries is not solicitation: If a former client or employee approaches the Individual without prompting, this is not considered solicitation.
2.1.3 General marketing or advertising is not solicitation: Public advertisements or social media posts that do not target specific clients or employees are not considered solicitation.
2.2 What Constitutes Solicitation?
Examples of solicitation include:
Directly contacting a former client to offer services.
Offering incentives to clients or employees to switch to a new business.
Seeking to divert business from the former employer.
Actions that do not constitute solicitation include:
Receiving inquiries from former clients or employees without prior contact.
Public advertising that is not directed at specific former clients or employees.
3. Relevant Case Law
Courts have provided guidance on solicitation in the following cases:
1. Ballance v Ballance [1997] FCA 1206
The court held that direct contact with a former client to encourage them to switch providers constitutes solicitation.
2. TKW Research Pty Ltd v Leach [2001] NSWSC 1078
The court clarified that actively offering services to a former client is solicitation, but passively receiving inquiries is not.
4. Risk Mitigation
To mitigate the risk of breaching the restraint clauses, we recommend the following:
4.1 Confirm the Individual’s Client List and Contacts
Request a list of clients and contacts the Individual worked with at their previous employer. Ensure they do not engage with any overlapping clients for the restraint period.
4.2 Limit the Individual’s Work in NSW for the Restraint Period
Consider assigning the Individual to clients or projects outside NSW or Sydney for the first 6 months to avoid triggering the non-compete clause.
4.3 Include a Warranty in the New Employment Agreement
In the Individual’s new employment agreement, include a clause confirming that they have disclosed any existing restraints and warrant that their duties will not breach those restraints.
Ensure that the Individual:
Does not initiate contact with former clients or employees.
Only responds to inquiries if contacted first.
Avoids using any confidential information from their previous employment.
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The content given herein is provided for information purposes only. It is general in nature and does not constitute legal advice and should not be used as such. Formal legal advice should be sought in particular matters.
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