Employment contracts often include restraint clauses designed to protect a business after an employee leaves. These clauses may restrict an employee from working for competitors, contacting clients or using confidential information.
However, employers cannot create unlimited restrictions. Courts will only enforce restraint clauses that go no further than reasonably necessary to protect legitimate business interests.
The Victorian Court of Appeal recently considered this issue in Just Group Limited (ACN 096 911 410) v Nicole Peck [2016] VSCA 334. The decision confirmed that overly broad restraint clauses may be unenforceable.
Quick answer: Are restraint clauses in employment contracts enforceable?
| Question | Answer |
|---|---|
| Are restraint clauses automatically valid? | No. Courts only enforce restraints that reasonably protect legitimate business interests. |
| Can employers stop employees working for competitors? | Sometimes. The restriction must be reasonable in scope, location and duration. |
| Can courts rewrite unreasonable restraint clauses? | Generally, no. In many Australian jurisdictions, an overly broad restraint may fail completely. |
| What did the Just Group case decide? | The Court found the restraint clause was too broad and refused to enforce it. |
Background of the Just Group restraint clause case
Ms Peck worked as Chief Financial Officer at Just Group, a fashion retailer with more than 1,000 stores and online platforms.
Just Group operated several well-known brands, including Smiggle, Peter Alexander, Just Jeans, Jay Jays, Portmans, Jacqui E and Dotti.
Ms Peck started working for Just Group in January 2016. She resigned in May 2016 after accepting a position as General Manager of Group Finance and Treasury at Cotton On, a competitor.
Just Group attempted to enforce the restraint clauses in Ms Peck’s employment contract through the Supreme Court of Victoria.
The contract attempted to prevent Ms Peck from working with 50 retailers, including Cotton On, across Australia and New Zealand for between 12 and 24 months.
What did the restraint clause prevent?
The employment contract restricted Ms Peck from participating in activities that were:
- the same as or similar to Just Group’s activities;
- performed for or on behalf of the listed companies; or
- connected with assisting or advising those businesses.
The restrictions applied whether Ms Peck worked directly or indirectly with those businesses.
The law on restraint clauses in employment contracts
A restraint clause starts as invalid unless an employer can prove that it protects a legitimate business interest and remains reasonable.
Employers may have legitimate interests including:
- confidential information;
- trade secrets; and
- customer relationships.
However, the restriction must not go beyond what the employer reasonably needs to protect those interests.
The Court considered the general principles surrounding restraint clauses and found that Just Group’s clause went too far.
You can read further information about Victorian court decisions through the Supreme Court of Victoria.
Why did the Court reject the restraint clause?
The Court accepted that Just Group had legitimate interests in protecting confidential information.
However, the restraint clause was too broad because it could prevent Ms Peck from working in almost any role with a fashion or retail business.
The wording prevented employment with businesses that were “similar” to any part of Just Group’s operations. The Court found this created an unreasonable restriction on Ms Peck’s future employment opportunities.
The clause also listed 50 businesses. Just Group did not provide evidence showing that Ms Peck’s confidential information was relevant to 46 of those businesses.
As a result, the restraint could prevent Ms Peck from working for companies where her previous confidential knowledge had no connection to the role.
Why was the restraint period unreasonable?
The restraint period lasted between 12 and 24 months.
The Court considered this unreasonable because Just Group could terminate Ms Peck’s employment during her first six months with only one month’s notice.
The Court found it difficult to justify preventing Ms Peck from working elsewhere for up to two years when the employer could end the employment relationship much sooner.
Can courts fix an unreasonable restraint clause?
Some employment contracts include “cascading” restraint clauses. These clauses provide multiple options, allowing a court to remove a broader restriction and enforce a narrower one.
The Just Group contract included provisions allowing certain words, locations or time periods to be removed if necessary.
However, the Court refused to rewrite the clause because doing so would effectively create a new agreement between the parties.
When can a court sever a restraint clause?
A court may remove parts of an unenforceable restraint clause in limited circumstances.
The remaining clause must be able to operate independently without the court adding new words or changing the meaning.
In this case, Just Group argued that the Court could remove 49 businesses from the list and keep the restraint only against Cotton On.
The Court rejected this argument because the list formed part of a single covenant. Removing businesses from the list would have required the Court to remake the agreement.
How does NSW law differ?
The outcome may have been different if the case occurred in New South Wales.
The Restraints of Trade Act 1976 (NSW) allows NSW courts to read down or modify unreasonable restraint clauses in certain circumstances.
In Victoria and many other Australian jurisdictions, courts generally cannot rewrite an unreasonable restraint clause to make it enforceable.
Key lessons for employers and employees
| Lesson | Explanation |
|---|---|
| Restraints must be reasonable | Courts assess each restraint based on the individual circumstances of the employment relationship. |
| Employers must prove reasonableness | The employer seeking enforcement must show that the restraint protects a legitimate interest. |
| Salary does not determine validity | A high salary does not automatically make an unreasonable restraint enforceable. |
| Acknowledgements are not enough | An employee agreeing that a restraint is reasonable does not guarantee enforcement. |
What should employers do when drafting restraint clauses?
Employers should carefully review employment contracts to ensure restraint clauses protect genuine business interests without restricting employees unnecessarily.
A broad “one size fits all” approach may result in the entire clause becoming unenforceable.
Seeking legal advice before relying on a restraint clause can help employers reduce the risk of enforcement issues.
Need advice about employment contract restraint clauses?
Restraint clauses require careful drafting and consideration of the circumstances surrounding each employment relationship.
If you need advice about employment contracts, restraint clauses or enforcing post-employment restrictions, contact us for assistance.
This information is provided for general purposes only and does not replace legal advice specific to your circumstances.
If you or someone you know wants more information or needs help or advice, please contact us on (02) 9818 2888 or email [email protected].