How effective are your Post Employment Restraints?

How effective are your Post Employment Restraints?

Much damage can be done to a business when an executive or senior manager resigns, taking with them valuable customer and confidential information. Restraint of trade clauses, or post-employment restraints, play a crucial role in protecting the legitimate interests of the employer.

In order to protect business interests employment contracts should contain protections which operate after the employment ends.

The purpose of Restraint of Trade Clauses

Restraints of trade are included in employment contracts to protect an employer’s trade secrets, confidential information, customer connections and staff connections by restricting an employee’s activities after they have left employment.

A restraint clause is void unless it is reasonably necessary to protect the legitimate interests of the employer. The legitimate interests of a business will generally relate to confidential information, trade secrets and customer connections.

Accordingly, a restraint clause in an employment contract will only be enforceable if the restrictions imposed are no more than necessary for the protection of the employer’s legitimate business interests – this will depend on the particular clause and the circumstances of each case.

A restraint clause typically prevents an employee from:

  • contacting the employer’s clients for the purposes of selling goods or services or enticing the clients away from the employer;
  • setting up a business competing with the employer’s business or working in a competitive business; and
  • poaching employees of the business.

Reasonableness

When determining whether restraint clauses are reasonable, courts will consider the following:

  • The negotiation process, and in particular comments made when negotiating restraint clauses.
  • The bargaining position of the parties. Was there an imbalance of power between the employer and the employee at the time of agreeing to the restraint?  Did the employee have the opportunity to obtain legal advice?
  • The nature of the employer’s business and characteristics of the employee. The closer the employee is to the employer’s customers, the more likely the restraint may be considered reasonable.
  • Whether any consideration was given for the restraint.
  • The duration and geographical area of the restraint. The longer the time and wider the area, the less likely it will be reasonable. 

The reasonableness of the restraint must be decided at the date of entering into the employment contract. For this reason, it is important that the parties to the contract each have an opportunity to negotiate the terms of a restraint. In addition, employees should be encouraged to seek legal advice about the length and the effect of the restraint.

The trend of Waterfall or Cascading Clauses

Restraints are often applied for a specified period, in relation to a particular geographic area.

A common device for reducing the risk of invalidity on the ground of unreasonableness is to include ‘waterfall’ or ‘cascading’ clauses. These are alternate provisions contained in an employment agreement that may enable a court to strike out a harsher (unreasonable) restraint whilst retaining a less-restrictive and reasonable clause.

The advantage to these is that each clause is severable by a court without affecting the validity and enforceability of the restraint.

How do courts enforce restraint of trade clauses?

Employment contracts and restraint of trade clauses must be carefully drafted to ensure they can be enforced through a court. In such cases, an employer must persuade the court that the clause is reasonable and therefore valid and enforceable.

When considering enforceability, the court will consider two key issues:

  • whether the employer has a legitimate interest to protect; and
  • whether the restraint is a reasonable protection of that interest

What are the legal remedies?

The common remedy sought by employers faced with an employee’s breach of a restraint clause is to seek an injunction to restrain an employee or former employee from acting in a way, or continuing to act in a way, that breaches a term of the former employment contract. For example, an injunction may prevent a former employee from working for a competitor for a certain period of time or from using or disclosing information confidential to the former employer and its business.

Some Tips for business owners

Some tips for drafting restraint clauses in employment contracts:

  • Make sure the period of restraint is appropriate to the employee’s position and access to confidential information.
  • Make sure the prohibited activities to be prevented are similar to the employee’s current activities.
  • Ensure contracts are reviewed regularly and updated to reflect changes in the employee’s role.

Conclusion

Having an enforceable and valid restraint in employment contracts is crucial if an employer hopes to rely on it to enforce a former employee’s post-employment obligations.

This issue needs to be considered by employers when the employment contract is drafted because a court will consider the reasonableness of the restraint as at the time the contract was entered into. The courts will only find that a restraint clause is valid and enforceable where a business can demonstrate that it has a legitimate interest to protect and that the clause is reasonable.

We are able to review, draft and advise on restraint clauses and their enforceability generally.  If your business needs assistance, please contact us on (02) 9963 9800 or via our contact form here.

Are electronic signatures the new norm? COVID-19: Executing Contracts and Deeds.

Are electronic signatures the new norm? COVID-19: Executing Contracts and Deeds.

With increased safety precautions of social distancing and restricted business opening hours in place, many employees are working from home. One consequence is that many projects may stall if there is an inability to sign contracts that require renewal or documents to complete transactions. This raises the question of how company contracts can be signed remotely and what are the risks. Are electronic signatures a solution?

What is an electronic signature?

A broad definition is that it is a visible representation of a person’s name or mark, placed by a person in a communication or on a document to indicate their assent. This may range from a typed name of the sender, a scanned image of a handwritten signature or clicking “I agree”. Each has a varying level of security and encryption, which may be vulnerable to copying and tampering.

General agreements

Under common law, an agreement can be in electronic form and executed electronically. There is additional validation from the Electronic Transactions Act 2000 (NSW) if the signature complies with specific conditions relating to the identity of the person, reliability of the signing method, and consent of the person to whom the signature is given. The law does not provide guidance on how electronic and attestation of documents should take place, and there still remain circumstances in which parties and lawyers are unwilling to accept electronic signatures.

Execution of documents by companies – section 127 of the Corporations Act

There are specific requirements for companies signing agreements. Ordinarily, a common seal can be affixed to the document and be witnessed by two directors or one director and a secretary. It can be signed without a seal but again by two directors or one director and a secretary. In the current circumstances, there are ways to manage the risks surrounding electronic execution of company documents. The people requiring signatures should obtain evidence that the person signing the document is actually authorised to sign the document electronically. The parties should ensure that there are no limitations as to the mode of execution by checking the board minutes, corporate constitutions and powers of attorney, and ensuring that the ASIC records and the identities of the directors and secretaries are verified. Companies should consider appointing a power of attorney as a power of attorney can electronically execute agreements on behalf of a company.

Conveyancing contracts

The Conveyancing Act permits deeds to be created in electronic form, and to be electronically signed and attested. The Act also states that documents relating to land interests can be electronic and signed electronically. It is important to note that the operation of other requirements in the Conveyancing Act will continue to apply to contracts or deeds whether they are electronic or on paper. It is important that you obtain proper legal advice before you enter into a conveyancing contract.

Execution of deeds

The law is settled that a document can be witnessed electronically. This will only be valid if the witness was physically present at the time the electronic deed was electronically signed by the signatory and the witness electronically signed the same document at the same time as the signatory. Unfortunately, this means that attestation cannot be conducted by teleconference or signed at a later time, presenting the same logistical requirements as witnessing a paper document.

Conclusion

In the absence of clear authority, we recommend a conservative approach to minimise risk and prevent one or more parties from suffering loss. If a document can only be executed electronically, then try avoiding a deed and instead use an agreement because a deed does not require a consideration (payment) but an agreement does. Therefore, you can look at whether consideration has been given in order to determine validity of a document.

Further information

It is important to be fully aware of your obligations and options in your contractual arrangement during difficult times such as COVID-19. If you would like further information regarding the impact on your business or simply corporate and contract law advice, please do not hesitate to contact one of our experienced solicitors on 9963 9800 or via our contact page.

More information about COVID-19 can be found here: www.health.gov.au