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Court finds 15km post-employment restraint reasonable

Court finds 15km post-employment restraint reasonable

One of the most common problems faced by real estate employers is what to do to protect the commercial goodwill of the business from exploitation by ex-employees. REEF's Workplace Relations Advisor, Laura Clark, examines this all to common problem and details a recent Supreme Court case where a real estate employer successfully had a post-employment restraint upheld.

Issues concerning the post-employment activities of ex-employees are one of the most common conversations we have with members. This includes things from trying to prevent an ex-employee from working with a competitor agency, to ex-employees approaching (or rather poaching) clients of the employer (either vendors or landlords), to ex-employees starting up their business in competition with the employer. One common feature in all these discussions is the realisation that enforcing a post-employment restraint is a most frustrating and legally complex predicament! But be assured, despite criticism that post-employment restraints in employment contracts have questionable legal value, the employment contract is still the main instrument by which your business can protect itself from ex-employees.

The only implied obligation which remains post-employment is that the ex-employee cannot use or disclose confidential information or trade secrets of the employer. If you wish to impose more general restraints on an ex-employee, you must do so by agreement in a form that is usually written into the employment contract.

Recently, the NSW Supreme Court found that a real estate agency’s attempts to impose restraints on a former employee (a property manager) within a 15 kilometre radius were reasonable and that the former property manager’s failure to abide by this restraint amounted to a breach of contract. 

In determining whether to enforce a restraint provision in an employment contract, the court will consider whether the restriction itself, the radius of the restriction and the period of the restriction go beyond what is necessary to protect the employer’s interest.  

In this particular case, the employee set up her own company operating in the same area, and in competition with her former employer, during the final two months of her employment. The employee admitted to having approached a number of her previous employer’s clients before and after the termination of her employment, in attempts to get those clients to direct their business to her new company. In all, the employee obtained 25 of her former employer’s clients. The Employment Agreement (which was the REEF template with amendments) contained restraint provisions, including that the employee was restrained from using confidential information to her own advantage without the prior consent of the employer.  A post-employment restraint of 6 months and 15 kilometres was also imposed. 

The agency sought to enforce the restraint and asked the Court to find that the former employee’s actions constituted a breach of the contract of employment.
The judge ruled that a restraint of 15 kilometres from the office was an “appropriate balance to protect the plaintiff’s confidential information and to provide the freedom for the defendant to establish a viable business.” 

In summing up, the judge also made the following observation:

“There is no issue that the defendant has breached the terms of her Employment Agreement. Those breaches include acting in breach of her implied duty of loyalty and good faith and using the plaintiff’s confidential information other than in the performance of her duties. The defendant obtained a springboard for her own business by poaching the plaintiff’s clients. This was done in part by misusing the plaintiff’s confidential information and providing it to [the new business] for the purpose of establishing the business by poaching the plaintiff’s clients.”

This case demonstrates how important it is for real estate employers to include restraint provisions in an employment agreement, and the extent to which a reasonable restraint can protect your business.  The case also highlighted the importance of employers taking great care to ensure restraint provisions are crystal clear, so that the employee and employer fully understand the extent of the restraint and the restrictions the employee must abide by after termination.  An error or misunderstanding in these provisions could result in the restraint being unenforceable. 

Commentary

As REEF has stated many times previously, this area of law is governed by discretionary principles of reasonableness and fairness and there will always be a degree of uncertainty as to whether or not a particular restraint will be enforceable.  The Courts have generally looked unfavourably upon any bar to competition in a free enterprise economy which operates to reduce the freedom of the individual to contribute his or her skill or experience.  A post-employment restraint is therefore regarded as invalid unless the employer can establish that it is confined to reasonably protecting the legitimate business interests of the employer and not unduly injurious to the interests of the employee and the public.  

Each situation will have to be assessed on its own particular set of facts and circumstances.  Notwithstanding, employers who do not insert restrain provisions into their contracts of employment will find they have few, if any rights to prevent an employee from poaching their clients or business.

Members are strongly encouraged to talk to one of our workplace relations advisers prior to commencing any legal action against a former employee for breaching post-employment obligations prescribed in the employment contract. Further, members can find sample Employment Agreements, including restraint provisions, in the People Management System of the REEF website.

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The Real Estate Employers’ Federation is the leading workplace advisory service for real estate employers in New South Wales. REEF is also the only industrially registered organisation providing services to real estate employers in Victoria, Tasmania and the Australian Capital Territory. 1,500 members can't be wrong!

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