Restraints and Post Employment Obligations

Restraints of trade are particularly prevalent in the professional services industry where employees develop long standing relationships with clients, which in turn makes it likely the client will follow them where the employee moves to new employment or establishes their own firm. The traditional positon is that clauses in employment contracts in restraint of trade as contrary to public policy.  In NSW the onus in this positon is reversed such that a restraint of trade is valid to the extent to which it is not against public policy.  In this context “public policy” generally covers two elements:

1. The restrain relates to a legitimate interest of the employer.  Protection of client relationships may be a legitimate interest while the prevention of competition is not; and,
2. The scope of the restraint is no greater than needed to protect that legitimate interest.

Restraints of trade are costly to enforce and challenge but that the consequences of ignoring them can be devastating. Proceedings concerning restraints of trade are generally brought in the Supreme Court. In the event a person acts in breach of a restraint, and a Court finds that it was a reasonable restraint, that person will be liable to compensate their former employer for the extent of the loss suffered as a result of the breach. This can be and, often is, more than the former employee gained by the breach.