Are Executive Restraint Clauses Really Enforceable?

By Guest blogger - Nov. 20, 2012
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restraint of trade, restraint clauses, non-compete, non-solicitation, The People DepartmentEditors Note: This is a guest post written by Sam Baker, a cofounder of The People Department. Her opinions are her own.

The recent upholding by the Federal Court of a post-employment restraint clause highlights the intricacies involved with departing employees, especially when they hold senior roles in the business, and gives us further insight into the operation of the long-standing presumption that restraint of trade clauses are generally held to be void.

The ‘face of a business’ test

This recent case confirmed that as the “face” of a business, an employee may be prohibited from accepting roles in the same field despite non-solicitation agreements already in place.

A two-year restraint was placed on the former managing director of human resources and recruitment outsourcing company HRX from participating in any consulting work. Having already accepted a senior position with Talent2, a direct competitor of HRX, the employee was prevented from starting in order to preserve HRX’s existing customer base.

As the face of the business, the threat of HRX losing its customer base was seen as a legitimate concern.

Usually a restriction on being engaged in a business that is similar to or in competition with the employer’s business will generally be deemed anti-competitive. However, if there are clear and compelling business reasons we are seeing that it is possible to have these clauses enforced. In the HRX case the employee was awarded payment for 21 of the 24 months of the restraint period as compensation.

Restraint and non-solicitation clauses

Restraints can be upheld where clear and defined restrictions are placed on the solicitation of clients, customers or employees of the employer.

A restraint clause that prevents the solicitation of specific clients that the employee has been in contact with is going to have a better chance of success than a broad or non-specific alternative. And if your business is well-established you have a weaker case if you try to prevent an employee from working in the same industry or starting their own business. Generic restrictions are unlikely to be upheld so give some thought to things like the position of the individual and the real threat that their leaving may pose to the business if you decide to include one.

The way the courts are able to interpret and apply restraint clauses differs from state to state, so having professional assistance in drafting your restraint clauses for at-risk roles in your business is certainly worth considering.

It is a lesson for employers that a non-solicitation clause is often not enough when moving jobs within the same industry. Businesses wanting to preserve their client database will be held accountable for financial compensation of departing employees even if the restraint is designed to protect a legitimate business interest.

If used sparingly and with thought given to the drafting of restrictions that are necessary to protect your business specifically, restraint clauses can be a useful tool in managing employees’ actions once they move on, whatever the circumstances surrounding their departure.


Please note that the information in this post does not constitute legal advice and should not be relied upon as such. The People Department does not accept liability for any loss or damage that may arise from any such reliance.

Sam Baker is one of the cofounders at  The People Department – a boutique Human Resources consultancy. With qualifications in HR, Business, Employment Relations and Training & Assessment her HR experience includes the nuts and bolts of managing day-to-day HR operations and performance issues. It also encompasses national enterprise agreements, regional reward and recognition programs, national training programs, large-scale re-structures, M&A and change management initiatives.


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