Restraining employees, the right way

Post-employment restraints can be necessary to maintain the integrity of your client base but, as PETER VITALE reports, it is a tricky area of law and will need a back-up plan.

By Peter Vitale

Post-employment restraints can be necessary to maintain the integrity of your client base, but it is a tricky area of law and will need a back-up plan.

Recently I wrote that courts in Australia were taking a dim view of lengthy post employment restraints. In uncertain times, a lot of employees and employers are thinking harder about whether a restraint of trade clause is enforceable or not.

A recent NSW Supreme Court case provides a useful illustration of the extent to which the courts will tolerate a restraint of trade.

In Tullett Prebon (Australia) Pty Ltd v Simon Purcell, the court granted injunctions effectively preventing the former employee from working for his new employer for six months.

Simon Purcell had been employed as a derivatives broker by Tullet Prebon (TP) since 1999. His contract of employment contained terms preventing him from soliciting or accepting the business of clients of TP for a period of three months after his employment ended. It also prohibited him from working for a competitor of TP or from trying to poach TP’s employees for three months.

In April 2008, Purcell resigned from his employment to take up a position at competitor BGC, and almost immediately started transacting business with clients of TP that he had been responsible for when employed there.

TP successfully sued Purcell and obtained an injunction, which the court said was necessary to protect TP’s legitimate interests in its connections with its customers.

Justice Brereton said: “This is a classic case in which the individual broker is the persona of the employer in dealing with clients, but the employer invests considerable sums in building customer connection, including by funding a substantial expense account for the employee. Just because particular clients are regarded as having a close connection with a particular individual broker does not mean that the broker is entitled to treat the client as his or her own.”

Although the restraint was expressed to be only for a period of three months, the court found that Purcell had failed to give three months notice of termination, which was nominally required by the contract – although it was in any event a fixed term contract – and granted the injunctions for a six month period.

It was also suggested that TP may be able to pursue Purcell for damages according to a formula in his contract, because of his failure to serve out all of his fixed term. The court declined to grant an injunction for the entire remaining period of the fixed term contract, until July 2009, as it found this would be an unnecessarily lengthy restraint.

The lessons for employers are obvious:

• Make sure you limit restraints of trade to apply to businesses that are competitive with yours.
• Don’t make restraints any longer than are necessary for you to re-establish customer connections or ensure protection of your confidential information.
• Make post-employment restraints as simple and clear as possible, acknowledging that this is a tricky area of law and your drafting may need to include some “back up provisions”.

Peter Vitale is the principal of CCI Victoria Legal

Read more on employment agreements