Covering all your (client) bases
Employers can protect themselves from ex-employees acquiring the business' client base, even when the employee is employed at the time.
Prevent losing your clients
A valid contractual restraint binds the employee after termination which prevents them obtaining your clients from your business.
Implied duty - the risks
An employee has an implied fiduciary duty to act in the interests of the employer with fidelity and good faith despite a written employment contract. A formalised document is always a good idea to protect your business' interests.
Always seek legal advice before drawing up an employment contract, and entering one, and it is recommended to not solely rely on this implied duty. As it is just that, "implied". Furthermore, this duty is applied during the course of employment, it becomes limited after termination.
An employee not bound by a valid contractual restraint that binds them after termination can utilise the benefit of personal relationships built up with a particular client base to solicit any customer. They do not need to deliberately memorise or steal a physical list from the former employer's records.
Contractual restraint clauses
A restraint clause seeks to impose limitations or restrictions on an employee's conduct after they leave employment. Often restraint clauses provide that an employee will not approach, canvass or solicit any clients or customers of the employer for a period of time.
These clauses are intended to protect an employers legitimate business interests and its confidential information and clients.
Effectiveness
Restraint clauses are only valid and effective if they conform to the appropriate governing legislation. For example, the NSW Restraints of Trade Act 1976 requires restraint clauses to be reasonable in order to be deemed as valid.
A court in considering whether a restraint is valid is often asked to decide between two competing interests, an employee's freedom to earn a living against the need of an employer to protect its legitimate business interest.
Generally, an employer cannot protect itself against mere competition. Usually a court will not `read down' a restraint clause; if the restraint is ineffective it will be struck out immediately and not replaced with something more effective. There may be opportunity to state alternatives and the court may strike out the ineffective alternatives and leave the effective one in place.
For restraint clause breaches, a court can order an injunction (prevent party from contacting clients), damages (compensation for any loss suffered), and an account of any profits made by the breaching party.
Please note employment legislation governing trade may differ between Australia states: it is always advisable to speak to a legal practitioner when implementing a restraint clause in employment agreements or before commencing any legal proceedings.
Elements - generally
To be a reasonable and effective restraint clause, it must be limited to time, location and extent.
Tailor to the employee
Restraint clauses can be drafted to be potentially too wide and unreasonable. An open ended restraint clause could be struck down by a court. An employee who deals directly with an employer's clients and customers could be restrained as opposed to inserting a generic or pro-forma restraint clause in an agreement.
Period of time
A restraint clause can state a period of time impeding an employee from contacting an employer's client base, but if this time is longer than the time it takes a new person to establish a new client base, it may be seen as unreasonable and therefore ineffective in some states.
Location
A common restraint clause is confining an employee from contacting clients from a certain area either by a specific reference or by radius. In considering geographical constraints on an employee, employers must ensure that it is not more than necessary to protect your business and not seen to restrict competition. For example, it would be reasonable to restrain someone from contacting clients from the same suburbs but not in the same state.
A properly drafted restraint clause for an employee to protect your business' client base is an affective tool to protect an employer's legitimate interest from competition by an ex-employee. Make sure you cover all your bases and seek legal advice before drafting or agreeing to a restraint clause.
