February 2019 | Kieran Kelly
We have recently been asked to advise several clients in relation to the protections they have in place from former employees who have joined a competitor.
The scenario often takes a common form:
- a trusted senior employee hands in their notice of resignation;
- the employer discovers or is informed that the former employee is joining a market competitor; and
- the employer seeks advice in relation to whether they have any protections in place to prevent the former employee from harming their business interests.
The advice that is provided looks closely at the employment agreement that is in place.
Restraints of trade
A properly drafted employment agreement will include a restraint of trade clause. Such a clause must be designed to protect the legitimate business interests of the employer. The clause will typically state that the employee is restrained from commencing work with a competing business in a designated geographical area for a specified period of time. Subject to the restraint being valid and enforceable, the employer can seek an injunction to restrain the former employee from breaching the employment agreement if a risk of this happening arises.
An issue that often arises is that an employment agreement will not be sufficiently tailored for the circumstances of a particular employee. This means that each restraint of trade clause must correspond with the particular employee’s level of seniority and the prohibition should align with the present duties of the employee. A 2013 Supreme Court of NSW case found that an employee’s duties had changed so markedly over the period of their employment that the employer was found to have repudiated the employment agreement and the former employee was therefore not bound by the restraint of trade clause.
Similarly, an adequately drafted employment agreement will restrict an employee from using or disclosing confidential information other than in the course of their employment. Such clauses can effectively protect technical or commercial information from falling into the hands of competitor businesses.
If an employer suspects a former employee has been using confidential information in the course of their employment with a new employer, proceedings can be brought against both the former employee and their new employer. A recent District Court of South Australia judgment required Harris Real Estate to pay $750,000 to Toop Real Estate (Toop) in circumstances where Harris Real Estate had used 230 of Toop’s confidential files taken by a former employee of Toop.
What can I do?
It is critical that employers act proactively and are vigilant. This means ensuring that employment agreements are up to date and regularly reviewed. Waiting until an employee departs is often too late to dust off and read an old employment agreement. We suggest that this should happen, at a minimum, every six months.
We would also suggest that businesses establish systems to ensure that employees are only exposed to confidential information that is necessary for them to carry out their duties and that the removal of confidential information is either readily identifiable or preventable. For example, this might be through restricting the ability of certain employees to download customer lists or information that is unique to the business.
Taking certain precautionary measures need not harm your relationship with your employees and will often prevent the need to take legal action.
If you have any questions about the above or would like our assistance, please do not hesitate to contact us.