Most employment, contractor and franchise agreements include a restraint clause to protect the employer’s, principal’s or franchisor’s legitimate business interests.
And for good reason.
The last thing you want when John resigns to work for your primary competitor is for him to take half your client base with you. Or when Sally, an ex-franchisee, sets up down the road in direct competition with her former franchised store.
But before you start sending off your cease and desist notices or rushing off to Court to seek an injunction, there are some questions you should ask yourself first.
1. Do I Have a Valid and in Force Contract Containing the Restraint?
Just because your ‘standard’ employment contract contains a restraint clause, doesn’t mean you have one for this particular employee. Check your records and ensure you have a duly executed contract that remains in force, particularly the operative term. And that the employee has signed it!
2. Is The Restraint Reasonable?
Restraint clauses are void on face value, and will only be upheld to the extent reasonably necessary to protect your legitimate business interests. When the Court determines what is ‘reasonable’, they consider several factors including:
- The nature of the industry;
- The relevant role or position of the person you are seeking to restrain;
- Their level of seniority; and
- Remuneration or consideration given for the restraint.
Further, restraint clauses are subject to the usual rules of contractual construction, and so any ambiguity or improper drafting could render the entire clause void.
3. Have I Suffered Damage?
After confirming that your employee is subject to a restraint clause, it is sensible to adopt a commercial perspective when determing whether to expend all the time and effect to enforce it. In particular, can you link anything such as loss of certain customers or a downturn in business to the other parties’ actions?
4. If Not, Is There a Threat of Damage?
Even if you answered no to the above question, you may still consider enforcing the restraint if there is a threat of damage. For example, if you have checked the outgoing employee’s e-mails and see they have provided their personal contact details to clients, or e-mailed themselves client or supplier lists.
5. Have I Properly Considered the Legal Ramifications of Enforcement?
It’s one thing to rush off to Court to seek an urgent injunction, but quite another to run the proceedings to conclusion. Stop and consider the time and cost involved in litigation, and ask yourself ‘what is the worst case scenario and can I, and the business, risk that?’
Restraint clauses serve a proper purpose in the business world. But enforcing these clauses typically involves complex legal questions with serious ramifications for both parties. If you are considering taking such action, you should seek legal advice at the outset and, noting time is of the essence in such matters, quickly!
Questions? Ask our employment lawyers.