11/05/2012 6:23:09 AM
Paul Meredith -
An accounting firm has been successful in enforcing a restraint of trade clause against a former employee, allowing it to recover damages resulting from its loss of clients.
Restraint of trade clauses generally seek to restrict former employees from competing with their employer, or using the employer’s confidential information or trade secrets, and to prevent them from poaching clients of the employer, for a period of time after their employment has ceased.
At common law all restraints of trade are considered to be prima facie contrary to public policy (because they impose on an individual's right to work) and will therefore be void unless the restraint can be justified. The restraint will only be enforceable if it is reasonable in regard to the interests of the parties and the public.
We had noted in an earlier blog post that accountants have not always been successful in enforcing restraint of trade clauses against former employees.
However, a recent decision of the Victorian Court of Appeal demonstrates that restraint of trade clauses in employment contracts can be enforceable.
In this case, the employee had signed a contract of employment which made it a breach by the employee if, in the 3 years after he ceased employment, he were to provide defined accounting services to a person who had been a client of the employer, and for whom the employee had provided accounting services during the three years before his employment ceased. In the event of such a breach of the employment contract, it was provided that the employee must pay as liquidated damages a sum equal to 75% of the fees incurred by the client in the last full financial year in which the client had been a client of the employer.
The court, having found that the employee had breached the contract of employment, held that "the restraint was no more than was reasonably required to protect the legitimate interest" of the employer.
Paul Meredith (Member since: 4/07/2010 12:05:45 AM)
I am the Head of Professional Standards at the Institute, a chartered accountant and a former suburban practitioner.
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Thank you for "posting" this Paul.
I have a former employee that has done the same in that she has started employment within 20mtrs of my business and clients have followed her. Our contract states that she is unable to be employed within a 10km radius for a period of 1yr. What compensation can i get if any & the pro's & con's of going through this? thanks
Tanya, this is a matter on which you will need to seek legal advice. If a contract of employment contains certain terms, and there has allegedly been a breach of those terms, then the presumption would be that there should be scope for pursuing an action for breach of contract. A conversation with a solicitor should frame up the issues for you and allow you to determine whether the costs of pursuing a legal remedy make it worthwhile in these circumstances. We'd encourage you to share here any insights you come to in your consideration of these issues.
The Institute, in conjunction with participating law firms around Australia, provides our members with up to 15 minutes telephone consultation with a solicitor at no cost - details here (login required).
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