A recent 2010 Supreme Court Case – Stacks/Taree v Marshall – makes a number of observations about the extent to which employers can restrain employees who no longer work for them.
The employee, a solicitor, ceased employment with his employer, a law firm in Taree in November 2009. When he sought employment with another law firm in Taree, his former employer claimed he was prohibited from doing so because of restraint clauses in his contract of employment, which imposed 3 distinct restraints, each operative for a 12 month period.
The 3 restraint clauses prevented the employee:
Restraint 1 – from soliciting employees of his former employer;
Restraint 2 – from soliciting clients of his employer who were its clients either at the time of termination or in the year preceding the termination; and
Restraint 3 – from engaging in competitive activity, which was defined as working as a lawyer within 10 kilometres of the Taree or Wingham Post Office.
The employee offered an undertaking to the Court not to solicit his former employer’s employees but asked to have restraint 2 apply only to clients for whom he had worked in the 12 months leading up to his termination and for this restraint to apply for only 6 months after his employment ended.
The employer argued in favour of the 12 month restraint on the basis it would take 12 months to train up a replacement and introduce the replacement to the employer’s client base.
The Judge noted the employer had gone to “considerable lengths” to promote the employee to its clients and market his services. As such, the employer had a legitimate interest that was capable of being the subject of a restraint.
However, the Judge held that the critical concern was not how long it would take the employer to train up a replacement, but how long it would take to sever the connection between the employee and the clients for whom he had performed work. On that basis, the Judge held that 12 months was a justifiable restraint period but that the restraint should only apply to clients for whom the employee had performed legal services rather than clients of the employer generally. The Judge was influenced by the fact that 12 months was a time period agreed to in the contract and determined that some weight should be given to contractual choice where it was not unreasonable on its face.
With regard to the third restraint, the Judge observed that it prevented the employee from performing legal work for anyone within that designated area regardless of whether they had ever been clients of the employer. The Judge held that the third restraint might be appropriate if the first and second restraints were difficult to enforce. In the present situation that was not the case. The Judge held that a blanket covenant against competition which protects not only the employer’s legitimate interests in its own clients, but also competition in respect of those who are not its clients or have never been its clients goes further than is reasonably necessary for its protection. As a result, the Judge would not make an order in respect of the third restraint. He ordered the employer pay 80% of the employee’s costs.
The case demonstrates that it is not reasonable to prevent a former employee from performing work for clients who are not clients or former clients of the employer.