Common law is well settled as to how employers can protect their business interests by restraining former employees from discussing trade secrets or capitalising on relationships with the ex-employer's customers.

Trade secrets 

Courts have consistently stated that employers are entitled to have their interests protected and may do so by restraining employees divulging secrets or putting such secrets to their own use.

Apart from these exceptions, employers are unable to protect against competition and must be prepared to encounter competition at the hands of former employees.

A restraint that attempts to restrict competition or a restraint against the use of a person's skill or knowledge acquired in the employer's business will not be upheld as a valid restraint.

Poaching of employees by ex-employees In April 2005, the New South Wales Supreme Court (Aussie Home Loans v X Inc Services [2005] NSWSC 285) had to determine whether a restraint purporting to stop ex-employees from enticing existing employees to leave the employer was valid under common law principals.

The Court referred to previous decisions which held that an employer had a legitimate interest in maintaining a stable, trained workforce, which could be protected against solicitation and enticement by a former employee but such restraint had to be reasonable.

In the case in question, the restriction stated that employees could not for a period of 12 months after the termination of their employment, for any reason, solicit, interfere with or endeavour to entice away any employee or contractor of the employer.

Employees have the right to work for a rival business which may offer more attractive terms of engagement upon duly terminating their arrangements with the employer.

In this case, the NSW Supreme Court held that the 12 month restriction was unreasonably long, particularly having regard to the fact employees were only required to provide one month's notice to terminate their employment contract.

As the restraint clause could not be read down, it was held to be unenforceable at common law.

CCI Legal can assist employers in drafting an appropriate restraint clause.

In the matter of Miller-Smith v Richardson Pacific Ltd, at first instance, the WA Industrial Relations Commission was faced with a claim of contractual benefits in the form of unpaid redundancy monies at the rate of 3.5 weeks for each year of service.

The material facts of the matter before the Commission were:

• the applicant had worked in various capacities with the employer since 1988
• the applicant, at the date of her dismissal, was employed as the West Australian State Manager, whose contract of employment was mainly verbal but which contained the implied terms of the Minimum Conditions of Employment Act
• the employer was bound by a number of Federal certified agreements that applied to its production workforce. These agreements provided an entitlement of 3.5 weeks pay for each year of service in the event of a dismissal for reason of redundancy
• the employee was not covered by the certified agreements
• a practice had developed throughout the 1990s that when the employer made nonproduction staff redundant, employees were paid the same redundancy benefits as then applied to production employees bound by the certified agreements.
• there was evidence of this practice from a variety of documentary sources and by evidence of witnesses.
• the employee gave evidence that the managing director had confirmed the practice and told her that if she were made redundant, she would receive the same benefits.
• the ownership of the employer changed when another company bought its shares.
• during the “due diligence” phase, the Employer told the buyer that it did not have any policies or contractual obligations that affected the employee if she were made redundant.
• acting on this information, the buyer applied its own redundancy policy (2 weeks pay per year of service) when it made the employee’s position redundant.

The Commissioner found that the entitlement to 3.5 weeks redundancy pay arose out of the custom and practice of the employer since 1991.

He made a finding that there was no express term as to redundancy since the evidence given on that point was largely hearsay and inadmissible.

The employer appealed the decision on a number of grounds including that the Commission was in error in implying the term as a matter of custom and practice.

On appeal, a Full Bench of the Commission agreed that the Commissioner had erred in finding a term of contract based on custom and practice but allowed the employee to argue that the evidence demonstrated that there was an express term of the contract that ensured her entitlement to the redundancy payment of 3.5 weeks per year of service.

The express term arose out of the reported admissions by the general manager.

The Full Bench held that … “an informal admission by words or conduct made by a party or those in privity with a party is admissible evidence against the party of the truth of its context.”

The Full Bench affirmed the decision of the Commission at first instance, but for different reasons, and dismissed the appeal.

The moral of this case is this: management employees should be extremely wary of making informal comment as to contractual benefits to their employees.

Confirmation of such contractual rights should be left to more formal processes.