Customer connections are vital to the success of a business. All employers have a legitimate interest to maintain and protect their confidential information and customer relationships.
The fragility of an employer’s client base is often revealed when a key employee departs the business. It is not unusual for clients to follow the departed employee to their new venture (often a competitor). This can cause a significant economic loss to the former employer.
Protecting customer connections
One way that a business can protect its customer base is by ensuring that the contract of employment contains a well drafted post-employment restraint of trade. At a minimum, a ‘non-solicitation’ clause is essential to a contract of employment where the employee interacts with customers.
The purpose of a non-solicitation clause is to ensure that when an employee leaves, the business has a fair opportunity to transition the customer connection to another staff member. A valid non-solicitation clause would prevent a departing employee from immediately soliciting or accepting work from an existing client of the employer for a ‘reasonable’ period.
What makes a non-solicitation clause enforceable?
Non-solicitation clauses must be drafted carefully because the Courts will only enforce a restraint clause where it is necessary to protect the legitimate business interests of the employer.
In Steadfast IRS Pty Limited v Latchmi Mesuria [2020] NSWSC 947 (Steadfast), the Supreme Court of New South Wales provided some importance guidance on the type of factors that are relevant to determine if a non-solicitation clause in a contract of employment is valid and enforceable. We outline these factors below.
Protecting the legitimate business interests of your organisation
The starting position in New South Wales is that a restraint of trade clause is enforceable to the extent that is not contrary to public policy. This is a statutory legal position that has been created by the Restraint of Trade Act 1976 (NSW). This means that a restraint of trade clause is only enforceable to the extent that it protects the legitimate business interests of the organisation, such as protecting an employer’s client connections. A restraint of trade will not be enforceable if its intent is to stifle competition, or unreasonably restrict the employee from pursuing their career.
Factors that prove there is a ‘legitimate business interest’
There are certain factors that indicate the employer has a legitimate business interest, and therefore an enforceable restraint of trade clause. In Steadfast the Court held that a 12 month non-solicitation clause against a senior employee (the Defendant) was necessary to protect the legitimate business interests of the company.
The following factors were considered:
- The Defendant’s role was fundamentally focused on fostering client relationships and selling the employer’s products to clients. Accordingly, the Defendant was seen as the ‘human face’ of the employer.
- The former employer was not enforcing a ‘non-compete’ restraint. That is, the former employer was not preventing the Defendant from working for a competitor. It only sought to enforce the non-solicitation clause. By narrowing down the issues in dispute, it became clear that the former employer was only concerned with protecting its client base.
- The Defendant voluntarily agreed to the non-solicitation clause and acknowledged that the clause is reasonable.
- As a senior employee, the Defendant was intimately aware of the needs of the client and was required to build trust with those clients over many years.
- The Defendant was a ‘high performer’ and had a good reputation in the industry. As a result, some clients might hold a ‘sense of loyalty’ to the Defendant and approach the Defendant in her new venture.
- The industry of the employer is characterised by contracts that are generally renewed every 12 months.
- There is some evidence that the Defendant had already breached the non-solicitation clause.
Considering the above, the Court held that a 12 month non-solicitation restraint was valid, reasonable and enforceable against the Defendant.
Key takeaways
Staff turnover is normal, but employers should take steps to manage the real risk that a senior employee may take customers with them. This risk can be mitigated through ensuring that the contract of employment, at the very least, contains a well drafted non-solicitation clause.
Contact JFM Law on (02) 9199 8597 or email us if you have any queries about enforcing a restraint of trade, or if you want to update your employment contracts to include one.
The information contained in this post is current at the date of editing – 6 November 2023.
