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:

  1. 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.
  2. 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.
  3. The Defendant voluntarily agreed to the non-solicitation clause and acknowledged that the clause is reasonable.
  4. 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.
  5. 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.
  6. The industry of the employer is characterised by contracts that are generally renewed every 12 months.
  7. 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 send an email to front.desk@jfmlaw.com.au if you have any queries about enforcing a restraint of trade, or if you want to update your employment contracts to include one.