The Enforceability and Reasonableness of Restraint of Trade Clauses

A recent appeal decision involving two former human resource consultancy company employees highlights the factors courts will consider when determining the enforceability and reasonableness of restraint of trade clauses in employment contracts.

The first employee, Mr 'DM', was appointed as Outbound Sales Manager for Employsure Pty Ltd (Employsure) in February 2018 and then subsequently as Manager, Bright HR in June 2019, both senior roles involving the development and execution of the company's business strategy.

His 2018 employment contract contained confidentiality and exclusive employment covenants that he would not engage in outside employment without written consent, as well as a post-employment restraint that he would not be engaged in a business in competition with Employsure for a period of 12, 9, 6 or 3 months.

The second employee, Mr 'AK', commenced employment with Employsure in February 2018 as an Outbound Sales Consultant and, in November 2019, became a Business Sales Partner, the most senior-level of sales employee. His 2018 employment contract contained a confidentiality covenant and a post-employment restraint similar to DM.

In December 2020, DM accepted a position with ELMO Software, a direct competitor to Employsure, managing a sales team, and gave four weeks' notice, which was less than the 3 months required by his contract. He also offered to supply ELMO with the names of potential Employsure sales employees and provided AK's name, whom he had already approached about a role with ELMO.

On 12 January 2021, Employsure gave him three months' notice of termination and directed him not to attend the office but to remain available during business hours to respond to calls and duties as requested. In late January 2021, AK accepted a position with ELMO as an account executive and ended his employment with Employsure on 10 February 2021.

The initial decision, with regard to both employees, held that:

• The exclusive covenants were reasonable, and DM had breached those covenants by commencing employment with ELMO while still employed by Employsure;
• A post-employment restraint of nine months for DM was reasonable;
• DM breached his contract of employment by encouraging and inducing AK to leave his employment;
• A post-employment restraint of nine months was also reasonable for AK, effectively delaying his start with ELMO until 10 November 2021.

The appeal judges, comprising Gleeson JA, Leeming and Kirk JJA, supported the initial decision in all respects regarding DM. They noted,

"By taking up employment with ELMO to manage a sales team selling a competing software product while still employed by Employsure, Mr (M) proposed to engage in another business that may hinder or interfere with the performance of his duties to Employsure… Employsure had a legitimate interest in protecting its confidential information through a restraint against competition after the departure of an employee".

They also agreed that the restraint period imposed by DM's contract was reasonable.

However, the appeal judges were willing to grant some latitude to the length of the restraint clause imposed on AK. The judges acknowledged that while employed by Employsure, he had access to 'confidential information', including the productivity of the sales team and customer data, identities, and dealings due to the face-to-face nature of his role.

However, they disagreed with the initial ruling on AK noting,

"However, a restraint for a duration of nine months was unreasonable and His Honour's finding to the contrary should be set aside. The finding was irreconcilable with the related finding that much of the information to which Mr (K) was exposed would no longer be in his memory: Given the nature of his low-level position and duties, the parties should be taken to have reasonably expected that the currency of any confidential information obtained by Mr (K) would be short-lived".

DM v Employsure Pty Ltd; AK v Employsure Pty Ltd [2022] NSWCA 201 (11 October 2022)

For queries about restraint of trade, confidentiality agreements, or other employment questions, please contact Dean Cameron at Workforce Advisory Lawyers – We Know Employment Law on 1300 925 529, 0417 622 178 or via email to dean.cameron@workforceadvisory.com.au

Disclaimer: This information is provided as general advice on workplace relations and employment law. It does not constitute legal advice, and it is always advisable to seek further information regarding specific workplace issues. Liability limited by a scheme approved under professional standards legislation.