Lawyers and accountants frequently ask me about the enforceability of their post-employment restraints. There is a myth that all such clauses are unenforceable. This is not true, but many of them are poorly drafted and defective.

Purpose of post-employment restraints

Employment restraints of trade can discourage employees from leaving their positions by restricting their ability to work in their chosen field for a period after their employment has ended. While it depends on the facts of each individual case, a carefully considered and drafted restraint of trade clause in a contract of employment may achieve this outcome.

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Most of the clauses I tend to see are invalid and unenforceable because legal advice was not obtained on this technical area of law at the time of entering into the contract, or the restraint is a boilerplate that was not specifically drafted for the individual to whom it purports to apply.

Terminology

The terminology in restraint clauses can be confusing to the unacquainted. Here are common terms:

• Non-compete: These provisions attempt to restrain the lawyer, for a period, from working for a “competitor”, however defined.
• Non-solicit: These provisions attempt to restrain the lawyer from soliciting “clients” of the firm, past or present, including the clients of other lawyers at the firm.
• Non-poach: These provisions attempt to restrain the lawyer from poaching staff and taking them to the new firm.

What makes a post-employment restraint clause enforceable?

Restraints of trade are not automatically enforceable. The starting position for such provisions is that they are void as against public policy. A court will uphold a restraint of trade clause as valid only if the former employer seeking to enforce it can establish that the restraint is no wider than reasonably necessary to protect the legitimate proprietary interests of the former employer.

Key factors that will be considered when determining the validity of the restraint provisions include:

• Reasonableness in terms of the length and geographical scope of the restraints. As a rule of thumb, firms should ask themselves how long it will take the firm to adequately replace the departing lawyer and introduce clients to the successor.
• Whether the lawyer had access to genuinely confidential information (and critically, whether confidential information was downloaded and taken).
• Whether the lawyer can truly be said to be the “face of the business” for some or all clients. A first-year solicitor is unlikely to fall into this category.

Some of the common scenarios that may render a restraint clause unenforceable or more difficult to apply include:

• The absence of key definitions in the clause, such as a failure to define words such as “client” or “competitor”.
• A failure to limit the application of the restraints to a point in time that is reasonable. A firm established one hundred years ago seeking to prevent a lawyer from working for “all clients of the firm” will have trouble establishing the reasonableness of a restriction that applies before the lawyer was employed, or even born!
• The failure to update the contract of employment over time as a lawyer is promoted. The employment relationship is fluid. A restraint applying to a first-year solicitor may not be enforceable 10 years later when that same person resigns, having been promoted to partner without a new contract. If an employee’s duties, position, or level of responsibility has changed profoundly over time, the original contract may have been replaced by subsequent changes.
• Behaviour of the firm that might be inconsistent with the terms of the employment contract. If there is some form of “repudiation” (i.e. failing to pay bonuses or leave entitlements owed prior to employment ending) or some other nasty conduct post-resignation, firms may face allegations of repudiation, which can invalidate post-employment restraint clauses.

Generally, there is a 50-50 chance that a restraint will be upheld if an injunction is sought against a departing employee. A 2016 empirical academic study of the outcome of restraint of trade cases in Australian courts between 1989 and 2012, conducted by Hui Xian Chia and Ian Ramsay, found that employers were successful in enforcing an employment restraint of trade in 46.2 per cent of all cases.

Get advice

Restraint of trade clauses need to be considered at the start of employment (for law firms) and at the end of employment (for departing lawyers).

Firms or individual lawyers wishing to determine the enforceability of restraint of trade clauses should seek legal advice before making threats of legal action, as this is absolutely one area of the law where the individual facts of each case really do make a difference.

Paul O’Halloran is an employment partner at Dentons Australia.