If restraints of trade are designed to stop employees from working for a competitor, why do they so often fail in Court?  The simple answer is that many employers use generic restraints that fail to account for the specific employer-employee or employer-contractor relationship sought to be protected.  The case of Informax International Pty Ltd v Clarius Group Limited [2012] FCAFC 165 highlights yet again the importance of tailoring a restraint to suit the circumstances.

Recruitment and restraints

A restraint of trade is a contractual clause that allows an employer to limit an employee’s future employment decisions.  Restraints, or “non-competes”, are designed to protect an employer’s business interests by preventing an employee from using confidential information or skills gained in their employment to get ahead with a competitor. 

In Informax v Clarius, Clarius was a recruitment/labour hire company that contracted Mrs Menano-Pires, acting under her company Informax International Pty Ltd (“Informax”), as an IT contractor (“Clarius-Informax contract”).  Clarius placed Mrs Menano-Pires, through Informax, with Woolworths (“Clarius contract”).  The Clarius contract had an initial term of 3 months but was extended three times and lasted a total of 16 months.  When the Clarius contract expired, Informax and Woolworths entered into a contract under which Mrs Menano-Pires offered her IT services to Woolworths for a further 2 months.

On discovering that Informax and Woolworths had contracted together directly, Clarius sought to uphold the 6 month restraint of trade in the Clarius-Informax contract.  This restrained Informax and Mrs Menano-Pires from working for Woolworths for 6 months after the termination of the Clarius contract.  In addition, another separate contract between Clarius and Woolworths prevented Woolworths from soliciting the private services of Informax for 12 months post-termination of their agreement.

Interestingly, it was the separate Clarius-Woolworths agreement that formed the basis of the Court’s decision that the Clarius-Informax contract should be varied.  In coming to its decision, the Court found it was unfair that Informax did not know about the Woolworths restraint at the time of entering into the Clarius agreement.  Furthermore it was unfair to Ms Menano-Pires and Informax that Woolworths was restrained from hiring their services under the Clarius-Woolworths contract after their restraint with Clarius had come to an end.  Thus the Court exercised its power under the Independent Contractors Act 2006 (Cth) to reduce the restraint period in the Clarius-Informax agreement to four weeks.

Protecting your business interests

Recruitment companies bridge the gap between qualified contractors and a company in need.  The connection is what they offer and is an essential part of their business goodwill.  Informax v Clarius is a good example of how parties might try and cut out the middle man that brought them together.  The case also shows that when a recruitment company fails to draft a fair and considered restraint clause, the Court will only enforce it for a limited period of time.

Ideally, a restraint will act as a deterrent and prevent a contractor and client running off together.  However, if deterrence fails the party protected by the restraint may have a right to seek:

• An injunction to stop the parties working together;
• Damages for breach of contract; and/or
• An account of profits for any profit either party made through breaching the restraint of trade.

However, an employer can only seek a remedy if their restraint of trade is enforceable by the Court!

Is your restraint enforceable?

Unfortunately for Clarius, the Court in Informax v Clarius found that a six month restraint was unreasonable for an employer-contractor relationship.  Although the restraint was not entirely struck out, it was read down to apply for only four weeks once the Clarius contract came to an end. 

Although a four week restraint may seem small given the 16 month contract period, it was deemed appropriate for the circumstances.  In coming to its decision, the Court noted that neither Mrs Menano-Pires nor Informax had any confidential information about Clarius, nor had Clarius invested any time or resources into training Mrs Menano-Pires.  Furthermore, by virtue of being a contractor it was found that Informax should be subject to a shorter restraint period than an employee similarly retained by Clarius to provide services to Woolworths would be.

This does not mean that the Court will always invalidate a restraint of trade clause.  For example, if the contractor was privy to sensitive or privileged information, a longer period of restraint may be justifiable. To that effect, the period of restraint is likely to be longer when permanent employees are involved, in order to prevent employees from taking confidential business information from the original employer to a competitive business.  This was the situation in Pearson v HRX Holdings Pty Ltd [2012] FCAFC 111, where a restraint of two years was upheld for a CEO who was the primary contact for clients, privy “to all or virtually all” confidential business information and was the leader of innovation within the company.

What to do next time?

Restrictive covenants are useful contractual tools which play an important role in employment relations.  However, deciding on periods and terms of restraint is a difficult balancing act

• If periods of restraint are too short, recruitment firms or employers may be taken advantage of by contractors or employees;

• If periods of restraint are too long and burdensome on contractors and employees, the courts will not hesitate to invalidate them.

In May 2015 CML Lawyers hosted a lunchtime Workplace Workshop discussing restraints of trade in employment contracts.  For more information on this workshop and restraints of trade please contact Peter McNamara at peter.mcnamara@cml.com.au.