Restraints in Employment Contracts

Watch out for restraints in your employment contract!

I am not a fan of those restraints employers have decided to put into employment contracts. I understand why. Employers want to protect the goodwill in their business. There is nothing worse than employers losing a staff member only to see accounts follow them.

A recent decision in the Courts, Hanna v OAMPS Insurance Brokers Ltd (ACN 005 543 920) [2010] NSWCA 267 the NSW Court of Appeal decided to enforce a post-employment restraint of trade covenant which extended for 12 months throughout Australia. It appears the Courts are now willing to enforce clearly drafted restraint of trade clauses and to prevent former employees from poaching clients.

In OAMPS versus Hanna,the staff member worked for them for 20 years! It is a big decision to leave. After 18 years, Mr Hanna and OAMPS signed a written employment contract which included a “post employment restraint deed”. The restraint deed provided for a series of cascading restraints. Pursuant to the restraints, Mr Hanna was precluded for a maximum period of 15 months and a minimum period of 12 months from directly or indirectly canvassing, soliciting, or dealing with any client of OAMPS that he had dealt with during the two year period before the termination of his employment relationship with OAMPS. The maximum area of the restraint was the whole of Australia and the minimum area was the city of Sydney.“Cascading” restraints, which provide for a series of decreasing periods and areas of restraint, are common in employment contracts.

Mr Hanna resigned from OAMPS with effect from 28 May 2010. At the time he resigned, Mr Hanna was a team leader/client director, responsible for up to six brokers including two senior account managers, one account manager and three account executives.

On 7 June 2010 he commenced employment with a competitor of OAMPS, Strathearn Insurance Brokers (Strathearn). Mr Hanna told Strathearn that he would not be able to bring with him any business from OAMPS’ clients. However, evidence was produced to show that Mr Hanna told clients he was going to work for Strathearn and that if they wanted him to “look after them”, he would be able to do so. OAMPS brought legal proceedings to enforce the terms of the restraint deed. New South Wales employment contracts which contain restraints of trade are governed by the Restraints of Trade Act 1976. Fortunately Queensland has no similar legislation.

The New South Wales Act provides that a restraint is valid unless it is against public policy. The legislation also required OAMPS to “establish that the restraint deed is reasonably necessary to protect its legitimate business interests”. Queensland would rely on common law and may actually take a similar approach to the New South Wales Supreme Court in this case.

The court considered that the deed was intended to protect customer connections by preventing Mr Hanna from using his personal knowledge and influence over clients built up during his employment with OAMPS. The court ordered that Mr Hanna be restrained from soliciting clients with whom he had dealt in his time with OAMPS for a period of 12 months after the termination of his employment.

The finding that a period of restraint of 12 months was reasonable was based on the facts in this particular case. May be a court might find that such a lengthy period of restraint is too long in other situations. In the past we thought that restraint clauses in employment contractswere meant to put you off leaving and that courts will not act to enforce them. However, have the Courts asked themselves, why did the employee leave?

The employee has usually been the one who has maintained the relationship with the client, fought to keep them and yet the Employer has benefited over time from the employee’s skill, knowledge and experience. Quite often taken advantage of it too. How many employers do you know who freely pay bonuses for your hard work, who give pay rises without being asked by the staff member, who genuinely look after staff in a job that can be highly stressful, requiring long hours work commitment and an unfair work life balance? There are not many.

Now employers demand you sign unfair employment contracts which if you refuse, means loss of your job. You are forced to sign them. Sometimes they will not even let you take the document away to have checked. You wreck your career if you raise concerns about unfair work contracts or dare to query the restraint periods stated.
Employers should start learning how to keep staff and keep staff happy. But instead they choose to exploit them as much as possible. So when a staff member decides to leave, or take control of their lives and start their own business, employers will seek to protect themselves by hiding behind often unreasonable and unfair restraints.

Now the Courts have played into their hands. Yet if a client chooses to follow the staff member, he should have the right to do so. Particularly because the person who takes over does not have the same relationship as the previous Broker.First mistake, never contact your clients to tell them you are leaving and to follow them if you want. Let your clients find out indirectly and let them decide what they want to do.

However, this is a precedent that has changed things. The question is, if an employer sacked you or retrenched you, could they still enforce these unfair restraints of trade? If the client tracked you down, would they be prepared to go witness against you after you told them these restraints are in place? Why do staff leave companies? Maybe companies should do more to keep their staff happy? Why should they hide behind unreasonable restraints on former workers?

One things is for sure, this issue is not over.

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