Employers warned about employee contracts’ restraints of trade litigation risk



With the end of the year approaching and many businesses finalising employee remuneration and bonus payouts, employers are urged to use this opportunity to update their employment contracts, particularly provisions applied to confidential information and restraints of trade, which may be either unsatisfactorily drafted, or out of date, according to Harmers Workplace Lawyers.

Legal | News | Staff

By Paul Hayman

With the end of the year approaching and many businesses finalising employee remuneration and bonus payouts, employers are urged to use this opportunity to update their employment contracts, particularly provisions applied to confidential information and restraints of trade, which may be either unsatisfactorily drafted, or out of date, according to Harmers Workplace Lawyers.

Unfair Contract TermsAccording to Peter Ferraro, Senior Associate at Harmers Workplace Lawyers, employers should specifically tailor their restraint of trade clauses for individual employees, as generic ‘boilerplate’ restraint provisions do not provide sufficient safeguards in the event of possible litigation. Also, just as an employee’s circumstances change throughout their employment, so should their contracts of employment – and restraint clauses in particular are perhaps the most important to re-assess because, if they are out of date, they are less likely to be enforceable.

Mr Ferraro referred to a recent case in which two clients of IT firm IGL transferred their business to a competitor at which a former IGL employee had started working.  IGL’s restraint provisions, which stipulated that the employee would not directly or indirectly compete against them in all regions within Australia, were rejected by the courts on the basis of being ‘too broad’.

“This decision should sound a clear warning to employers that they can no longer simply use non-specific ‘boilerplate’ restraint provisions.  Although restraints can provide good protection for employers, I’m seeing a trend for courts to take a far narrower view on the scope of restraints. As a result this could see more businesses being caught out,” said Mr Ferraro.

Mr Ferraro said a common pitfall for business owners is assuming they are protected from departing employees simply because they have pre-existing restraint provisions in their contracts of employment.

“Unfortunately many employers simply ‘copy and paste’ generic restraint clauses into their contracts even though they might have little relevance to their business or an employee.  By specifically tailoring your restraint provisions to individual employees, business owners can ensure they are adequately protected from former employees potentially breaching those provisions by soliciting their clients, business or patronage,” he said.

“Employee-specific restraint clauses and their clear communication ensure employees are fully aware of their obligations and may reduce the likelihood of a breach of contract.  However, if a former employee does break their contractual obligations, then a sound contract will place the employer in the best position to be able to protect their business,” concluded Mr Ferraro.

Advice to businesses:

  • Seek proper advice and insert employee-appropriate restraint provisions in contracts of employment
  • Consider if the restraint provisions are reasonable to protect the specific business interests
  • Ensure restraint provisions are drafted clearly and unambiguously
  • Be wary of using standard “boilerplate” provisions – tailor to the particular circumstances
  • Ensure the language used is simple
  • Review the restraint over time
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