Contractual restraints that impose obligations on employees to abstain from certain conduct for a given period after the conclusion of their employment have obvious appeal to employers.

However, while such restraints can serve a legitimate function in affording a company the chance to protect important business relationships, two recent decisions of the Supreme Court of Victoria remind employers that they do not have carte blanche to impose any restrictions they see fit on the activities of ex-employees. Rather, as a matter of public policy, such restraints are prima facie void and courts will only enforce them if the employer can establish that the restraint is no more than what is necessary to protect the company’s legitimate business interests.

• BearingPoint Australia Pty Ltd v Robert Hillard [2008] VSC 115 (18 April 2008)

Mr Hillard was employed as BearingPoint Australia Pty Ltd’s (BearingPoint) managing director of information management. His employment contract contained provisions to the effect that the termination of employment required a 180-day notice period and following this, he was to be restrained for a period of 12 months from working for a competitor; soliciting business from any person, firm or company he had performed information management services for in the two years preceding the termination; and soliciting BearingPoint employees.

The contract also contained a provision that Mr Hillard admitted the restraints were reasonable.

Mr Hillard was offered a position at Deloitte Touche Tohmatsu (Deloitte) and BearingPoint terminated his employment contract with the necessary 180 days notice. During the notice period Mr Hillard was put on 'gardening leave’ and directed to stay away from work until the notice period expired. BearingPoint then sought to enforce the restraint to prevent him from taking up the Deloitte position.

Justice Habersberger  recognised that BearingPoint had a legitimate interest in having some time to allow Mr Hillard’s replacement to establish a relationship with BearingPoint’s clients.

While it was legitimate to put Mr Hillard on gardening leave, the restraint went far beyond what was necessary to protect BearingPoint’s interests and constituted an attempt to restrict competition, a restriction that Courts will not enforce.

Justice Habersberger found that the restraint was unreasonable as the period was too long and the restrictions too wide; the prohibition on soliciting BearingPoint clients extended to clients which Mr Hillard had not himself serviced. This was especially unreasonable as BearingPoint may have had up to a further 180 days total to establish the new relationship while Mr Hillard served the notice period (but even in the absence of the 180-day period the restraint was still unreasonable). The ‘admission’ of reasonableness in the contract was ineffectual as reasonableness is a question for the Courts to decide.

• Roberts Research Group Pty Ltd v Pyra [2008] VSC 16 (11 February 2008)

Mr Pyra was employed by Roberts Research Group Pty Ltd (Roberts Research). Prior to his employment Mr Pyra signed a deed which contained a clause to the effect that following the conclusion of his employment with Roberts Research he would be restrained for a period of 12 months from engagement in, involvement with or association with a business competing with the business of any customer of Roberts Research. This restraint extended to all customers that either Mr Pyra had ‘contact’ with or those who had disclosed ‘confidential information’ to him. One of Roberts Research’s major clients was Optus, and when Mr Pyra proposed to enter into employment with Telstra, Roberts Research sought to enforce the restraint clause.

Justice Mandie held the clause was unreasonable. In this instance mere ‘contact’ between My Pyra and Roberts Research’s clients at some stage during his employment could not justify a 12-month prohibition on any interaction whatsoever between Mr Pyra and their competitors.

Similarly, the mere disclosure of confidential information by Robert Research’s clients to My Pyra at some stage during his employment was not a reasonable justification for such a restraint. The definition of confidential information in the deed was far too wide and Roberts Research had failed to identify the confidential information disclosed to Mr Pyra which put their interests at risk.

What do these cases tell us?

The lesson to be learned here is that employers are not at liberty to impose whatever conditions they wish and should err on the side of caution when drafting restraints.

Employers should avoid inserting standard form restraints and be sure to draft each restraint carefully, taking account of the particular employment and the surrounding circumstances. Employers must first ascertain what legitimate business interests will be placed at risk following the departure of the individual employee and then do no more than necessary to protect these interests.  

Employers should be conscious that they face an uphill battle in seeking to persuade a court to enforce any restraint clause. While drafting a reasonable restraint is a difficult task, failure to do so will result in an ineffectual restraint and the company’s legitimate interests being placed - perhaps unnecessarily so - at risk.

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