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Employee restraints and the customer connectionPrint This Post

Employee restraints and the customer connection

Business Succession Update – Autumn 2013

If you want to preserve the value of your business moving towards retirement, make sure that your employees have valid restraints of trade provisions. This may sound obvious, but many restraint of trade provisions are copy and pasted from old documents by business owners who wish to save money and do not understand how they work. The result is usually disastrous.

Usually one or more of three types of restraints are used. They are typically non-solicitationrestraints, non-dealing restraints and non-competition restraints. Whether one or more of them will succeed depends on the nature of the business and the nature of the work of the employee.

A recent case on the point is the NSW Supreme Court decision of OAMPS Gault Armstrong Pty & Anor v Andrew Glover & Anor [2012] NSWSC 1175 where the court recognised that the power of attraction is a protectable component of goodwill. In that case, the plaintiff presented evidence that former employer would be exposed to the probability of loss of custom and goodwill attributable to the defendant’s force of attraction in the particular industry while working for a competitor (at [41]). On the basis of the evidence at the time, the court enforced, on an interlocutory basis, not only the non-solicitation restraint but also the non-competition one.

The Court’s enforcement of a non-competition restraint is generally unusual. The Courts do not usually prevent people from working in their chosen vocation.

Recent cases show that when in doubt, it is safer to have all three restraints in the employment agreement. Of the three types, the non-solicitation restraint is most likely to be upheld, the non-dealing restraint is usually OK (and less risky than the non-competition restraint) providing it is qualified by the rider that it only applies to those customers with whom the employee has a business or customer relationship – i.e. people that the employee has worked with. The all customer restraint has long since been ineffective.