Plain English Guide to Post-Employment Restraints of Trade & Protection of Confidential Information

The confidential information of a business is what enables it to exploit its goodwill, which in most cases is its single most valuable asset.

The unfortunate reality is that some of the biggest risks to the profitability of a business come from within.  Through simply doing their jobs, employees gain access to their employer's confidential information and trade secrets, and unless properly restrained, can exploit that confidential information for their own benefit, and to the detriment of their former employer.

This Plain English Guide looks at some of the key concepts in the law of post-employment restraints and confidential information, and provides some guidance on how a business can protect its confidential information from misappropriation and exploitation by its employees.

Are restraints valid?

The law recognises that employees have a right to earn an income, and to use their skills and industry knowledge for their own benefit.  Of course, businesses also have the right to protect their proprietary interests and goodwill in order to reap the fruits of their work and investments of time, effort and skill.  

Restraint terms in contracts have some characteristics that set them apart from standard contract terms.  In particular, they give a benefit to one party by creating an obligation on the other not to do something.  It is for this reason that restraints are not viewed favourably by the courts.  
Contract terms restricting a person's freedom to carry on a business, or enabling a company to gain a monopoly on trade are against public policy, and are therefore void...that is, unless they fit into an exception to the rule.

This exception is where the restriction is reasonable, having regard to the competing interests of the employer and employee, giving the employer adequate protection (but no more), and provided it is not contrary to the public interest.

Reasonableness

The concept of 'reasonableness' is about balancing the competing interests of the public, the employee and the employer.  A restraint of trade term would be considered unreasonable if it goes beyond what is reasonably necessary in protecting the legitimate business interests of the employer.  A restraint term may also be seen as unreasonable if it would cause hardship to the employee, or if the employee had not been adequately compensated for their agreement to be bound by the restriction.  

The test of 'reasonableness' therefore requires an examination of the circumstances of both parties.  Some factors that the courts will consider include:

  • the nature of the industry in which the business operates, and the services provided by the employee;
  • the relative bargaining position of the parties, including whether the employee had the opportunity to obtain legal advice before signing the contract;
  • the employee's connection to the business, and in particular, the relationships between the employee and the customers of the business;
  • the scope of the activities restricted under the restraint terms, including working in a competing business or poaching customers and/or employees of the business;
  • whether the employee received payment or other benefits in return for granting the restraint;
  • the scope of the restraint (i.e. its duration and operation) within a geographic area; 
  • whether the employer complied with its obligation to attempt to limit the scope of the restraint (e.g. activities restrained, area, length) to make it reasonable, thereby limiting its impact on the employee; and
  • whether the public might be unreasonably deprived of a service that might otherwise be performed by the employee.  For example, a restraint preventing a GP from working in a community where no other GP was available would deprive that community of access to medical care and would be against the public interest.

The factors described above demonstrate that it is essential for restraint terms in employment contracts to be carefully tailored to the business that will gain the benefit of the restraint, and to the employee that will be restrained.  

Protectable interests

Protection from the risk of nothing more than competition from a former employee is not a legitimate interest.  There must be something more at play which would make the employee's conduct objectionable.

Leaving aside intellectual property rights (copyright, patents and trademarks), legitimate interests that are capable of protection by a restraint of trade term include:

  • goodwill, including brand and reputation, as well as relationships with customers, suppliers and employees; 
  • trade secrets, which generally speaking, includes commercially sensitive information such as designs and formulas;
  • business relationships with referrers or sources of leads; and
  • confidential information, being information concerning the business not otherwise in the public domain, such as client contact information, details of existing projects, product and pricing information, marketing and business plans, tenders and quotes.

The reasonableness of a restraint is assessed against the circumstances that existed at the time the contract was entered into.  Therefore, it is a good idea to issue new employment contracts when an employee is promoted or if there is a significant change to the business, as the scope of the employer's 'legitimate interests' may have changed.

Confidential information

The term 'confidential information' relates to facts and/or knowledge that is not already in the public domain.  All employees owe limited obligations of confidence to their employer not to either make use of or disclose confidential information or documents acquired throughout the course of their employment without consent.  

However, it is sensible to supplement these existing protections by including a confidentiality term in contracts of employment, as a confidentiality term can be used to expand the scope of information protected from unauthorised use, can be crafted to suit the specific needs of a business, and may also be tied in with a contractual restraint of trade.

Before entering into contracts with employees, employers should make sure that they:

  • have a strong understanding of any specific confidentiality risks to their business; and
  • identify any classes of confidential information, as well as any key documents that are unique to their business which would require protection.  

A confidentiality term in a contract should:

  • cover the field of truly confidential information with reference to the specific needs of the company;
  • not cover the entire field of information potentially accessible by employees.

Contractual terms can be particularly important in protecting:

  • the employee's knowledge of industry contacts developed over the course of their employment;
  • the general contact details of clients and suppliers acquired incidentally during employment, including via LinkedIn.

What are the key risk areas for businesses?

Restraints

Some common mistakes made by employers include:

  • failing to act quickly after learning of a breach made by an employee;
  • using a template restraint term without tailoring it to the specific employee and their position within the business;
  • attempting to protect against every conceivable risk without regard to core legitimate interests;
  • going too far by not limiting the scope of operation to a reasonable and relevant geographical area and length of time;
  • failing to update contracts when an employee changes position; and
  • failing to obtain and keep a signed copy of the employment contract.

A well drafted restraint of trade term can help a business to protect its goodwill, however it usually requires a breach by an employee for a company to look closely at its restraint clause, by which time the damage may have already been done.

Misuse of confidential information

Due to advances in technology, employees have many ways to secretly copy and retain company data, including:

  • sending information by email to personal accounts;
  • uploading data onto personal cloud storage services such as Dropbox, iCloud or Google Drive;
  • copying files onto portable storage drives (USBs);
  • taking photographs of information on smartphones;
  • using personal devices such as laptops and phones for work purposes;
  • synchronising data across linked devices, e.g. a company iPhone can be linked via iTunes to a personal iPad.

In each case, the data originates from a source owned and operated by the company, but ends up on a device or service accessible by the employee, and outside the control of the company.

Businesses should understand how their data is accessed and stored by employees, and ensure that they maintain strict data security protections.  Businesses should ensure that departing employees return not only their keys to the office, but also whatever important electronic data they have accumulated during their employment.

How can Coleman Greig help you?

Coleman Greig Lawyers can assist you with all aspects relating to post-employment restraints of trade and the protection of confidential information, including:

Advisory

  • drafting contracts with suitable restraints for employees at all levels of seniority;
  • reviewing key risk areas which require the protection of contractual restraint terms; and
  • assisting with the development of policies and processes for data protection and the exit of departing employees.

Litigation

  • conducting proceedings to either enforce or defend the enforcement of contractual restraints of trade, including proceedings for injunctions; 
  • proceedings for preservation and recovery of confidential information and documents.

For more information on how our Employment Law lawyers can help you with post-employment restraints of trade and the protection of confidential information, please contact our team in Parramatta, Norwest and Penrith.

Disclaimer: The information provided in the document is a general summary and is not intended to be, nor should it be relied upon as a substitute for legal or other professional advice.