Enforceability of Restraint Clauses

Restraint clauses are becoming increasingly common in employment agreements and other contractual matters and are an important tool for protecting a business's legitimate interest. As they must be enforced in court, they are largely used as a deterrent and to put parties on notice as to what is expected upon termination of an agreement.

In a recent decision in the NSW Court of Appeal (McMurchy v Employsure Pty Ltd; Kumaran v Employsure Pty Ltd [2022] NSWCA 201 (11 October 2022)), the legitimacy of a restraint of trade on one ex-employee was upheld. Restraints that work to discourage competition on their own are not typically deemed enforceable. Courts will generally uphold a restraint where it is for the enforcing party's 'legitimate interest', where it is for a reasonable time period (considering the interest) and where this interest relates to confidential information that has the potential to be used to their detriment.

In this case, one former employee was restrained for a period of nine months taking into consideration the information he was privy to and how long that confidential information was likely to be “current and of a commercial advantage". In short, a restraint clause does not operate as a blanket restraint. The enforcing party must be able to demonstrate that the employee had access to information or acted in a way that was or had the potential to be detrimental to a legitimate business interest. In the current case, the restrained employee was closely involved in the development and launch of a HR software program which the competitor he moved to, had a similar product. The Court upheld the finding that "confidential information to which Mr McMurchy had access, including about the marketing, shortcomings and potential developments of the BrightHR software could be used by ELMO to the detriment of Employsure".

Key Points:

Restraints will only be enforceable if there is a legitimate interest to protect;

Courts will consider what is reasonable in terms of geography and time periods (highlighting the importance of cascading clauses); and

If you have senior staff with access to proprietary or other confidential information, you should include a properly drafted restraint clause in your employment contracts.