May 2012 | Jonathan Harris

Businesses are faced with many obstacles on a daily basis. In this market the idea of losing one of your employees to a competitor or to a start up company is distressing enough without the drama surrounding any trade secrets and confidential information that may also be lost.

It is generally understood that these clauses will be unenforceable unless the restraint imposes reasonable protection to the business interests of the employer. The question as to what is reasonable was considered in the NSW Court of Appeal decision Miles v Genesys Wealth Advisers Limited [2009].

In this case a former managing director had agreed not to engage or be employed in any business in competition with his former employer and not to solicit clients of the employer for 2½ years after the end of his employment. The managing director then proposed to establish a competing business within the restraint period and to entice away some of his former employer’s business contacts.

The Court decided that the restraint of 2½ years was reasonable. The relationships developed between the managing director and the employer’s business contacts during employment were also determined to be the “property” of the employer.

The Court said that to enforce the restraint the employer must point to an asset or advantage inherent to the business that would be unjust for the employee to use elsewhere (regardless of whether the employee contributed to its creation).

The Court said that the employee was free to use their skill and experience in their next job.

Obligations exist under the general law and employment legislation that can be utilised by employers to stop disclosure of trade secrets and confidential information by former employees. It is important to have a contractual agreement to protect the business’ confidential information and secrets. Once the employee leaves it is very difficult to control the flow of information.

You should ensure you have a signed contract of employee with an appropriate restraint clause. It is important to review those clauses over time and if the employee assumes a more senior role in the business. A clause that was appropriate for an entry level employee may no longer provide sufficient protection for your business.

If an employee does leave, it is imperative to seek legal advice immediately. Failure to act promptly to protect your interests can limit your ability to enforce contractual provisions to restrain your former employee.

Written by Jonathan Harris
Director
(02) 9231 2466

For more information please contact Jonathan on (02) 9023 9118 or by email jharris@hflawyers.com.au.

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