Confidentiality and Restraint Clauses in Employment Contracts

The loss of clients to departing employees is an all too common situation faced by employers.

A client’s choice to follow an employee can be completely unilateral, but frequently it is the result of the employee actively enticing the client away, either to the employee’s new employer or to the employee’s own newly established business. Having a carefully drafted employment contract in place can assist employers in mitigating their risk in this area.

Confidentiality Clauses

At common law, an employee has a duty not to disclose confidential or commercially sensitive information obtained in the course of his or her employment. This duty extends beyond the termination of the employment and exists even if there is no written employment contract in place.

The advantage of expressly providing for confidentiality obligations in a written contract of employment is that it allows an employer to state those obligations with a greater degree of specificity. Thus, the confidentiality clauses can be tailored in order to suit the employer’s individual business and method of operation. It also works to notify the employee of the rights claimed by the employer in respect of its confidential information. Employees who might otherwise be unsure as to what constitutes confidential information are made clearly aware of their obligations and an innocent or ignorant breach of those obligations is consequently less likely to occur.

Relevant confidential information to be protected by such a clause can include technical product information, client lists and contact details and any manuals in relation to business policies and procedures. It is useful for employment contracts to also provide that such specific confidential information, howsoever it exists, is returned to the employer upon cessation of the employment.

It can be difficult to know whether a client has unilaterally followed an employee or has been enticed by the employee through the employee’s unauthorised use of confidential information. Although the employer may be certain that it is the latter (through word of mouth or an unreasonably high number of departing clients), it can be very difficult to prove. These difficulties can be addressed by the use of restraint clauses.

Restraint Clauses

A restraint clause is one that restrains a party to a contract from carrying out certain acts for a defined period of time (during the period of the contract and after it has ended) and, usually, within a defined geographical area. Restraint clauses can exist in many different types of contracts. In the context of employment contracts, the Courts take a stricter view of restraint clauses due to there being a greater danger of an abuse of a superior bargaining position.

The default position taken by the Courts is that a restraint clause is prima facie void, unless it can be shown by the employer that the clause is reasonable to protect its legitimate business interests. If the clause is wider in operation or scope than is necessary to serve this function, it will be unenforceable.

Reasonableness is considered not only from the point of view of the parties but also by reference to the public interest. Reasonableness is judged at the time of entering into the contract and is determined by reference to a variety of factors including:

• the industry of the employer;
• the nature and the spread of the employer’s operations;
• the location of the employer’s clients;
• the business’ goodwill;
• the employee’s functions and duties, including level of contact with clients;
• the employee’s level of seniority and responsibility in the businesses structure;
• the employee’s knowledge and level of access to the employer’s confidential information.

Restraint clauses can be fashioned to restrain an employee from forming a competing business, joining or becoming involved with a competitor in any capacity, soliciting the custom of the former employer’s current clients (or recent clients) or employing or engaging an employee of the former employer.

Reasonable restraint periods are usually considered in terms of months, rather than years. Similarly, reasonable areas of geographical restraint tend to be expressed in terms of cities and states (and usually by reference to the employer’s area of operation), rather than countries and continents. That said, Courts have in the past found longer/wider restraints to be enforceable where, for example, the employee is long serving, highly experienced, at an executive level of management and/or the business/industry is highly technical and specialised.

An unreasonable restraint is invalid and unenforceable. Therefore, a restraint clause should be drafted on a cascading (or laddering) basis so that it provides for alternative, reduced periods/areas of restraint to apply were the wider periods/areas are found to be unreasonable (for example, a clause might provide that the longest enforceable period of 12 months, 6 months or 3 months will apply). However, one must be careful to not provide for too many scenarios as to be uncertain or leave it open to a Court to draw an inference that the parties have not made a genuine attempt to define the protection and merely find the clause to be invalid and severable in its entirety.

Conclusion

For many employers, the commercial impact of the loss of clients to a departing employee is rarely so great as to warrant the commencement of costly and risky legal proceedings, even if confidentiality and restraint clauses are in place. The main benefit of such clauses is not to provide an employer with a cause of action against an offending former employee for prosecution in Court, but, rather, to ensure that former employees are left in no doubt as to their obligations and the consequences that can potentially flow from the breach of such clauses. The deterrent offered by the mere existence of such clauses is, in the majority of cases, enough to ensure adequate protection of the employer’s interests.