Recently an SME client asked whether the law could help him stop his customers poaching his staff, and his (former) staff poaching his customers. As you can appreciate, these are difficult questions to answer.
In Australia, the general position is that restricting a person’s freedom to work is contrary to public policy. Courts don’t like to see such ‘restraint’ provisions in contracts. The reason is that they consider the legal system best serves the public interest if it ensures that individuals can work and compete as freely as possible.
There are two kinds of so-called ‘non-compete’ clauses: those that are in found in employment contracts, and those that are found in business sale agreements. And even though there is not much difference in the structure and form of a restraint clause in either context, what is reasonable in a business sale may not be reasonable in an employment agreement.
When a “restraint” clause is put into staff employment contracts, the business owner is often concerned about an experienced, senior manager or specialised employee leaving for, or being poached by, a competitor of the business. The risk is that the departing employee takes valuable information into the new job. An obvious example of such information is a list of the previous employer’s customers.
An employment restraint cannot be lengthy or wide-ranging though. Perhaps 12 months is a good rule of thumb, even for the more senior and or specialised employees In the case of a sale of business however, it can be acceptable to impose a restraint lasting several years on say the vendor or departing CEO.
Whatever the context, the validity of a restraint will come down to the evidence. If there is evidence that shows that a business has built a relationship with another business or its customers by virtue of the role or actions of the ex-employee, that relationship is deemed to be goodwill, and goodwill is legitimately protected.
To cope with the uncertainly, lawyers use a particular style of drafting to hedge their bets. That drafting is called a “cascade” clause.
Limitations on geographical reach, period of time after which the restrained person may act, and often nature or type of a new venture, are the three key parameter of a cascade clause. Successive sub-clauses cut down the extent of each restraint, so that a reasonable definition is eventually available should a court subsequently be asked to review the restrictions.
To solve the dilemma of the would-be client referred to at the beginning of this piece, the answer is that he obviously cant restrain his customers – in business you can really only induce loyalty by good service – but if the employees are sufficiently senior or specialist, a tailored cascade clause may be the answer.