Could an employment restraint stop a former employee from setting up a competing business? Which case won?
Employee’s employment contract includes restraint of trade clause
A case heard in the Supreme Court of NSW in 2017 concerned an employment restraint in a worker’s employment contract.
The company in question manufactured and sold school uniforms in NSW. The employee had worked in that industry for many years before she joined the company in July 2015.
Her employment contract with the company included a “restraint of trade” clause, preventing her, in the event she left her employment at the company, from starting up her own business in competition with the company for a period of either three or six months.
The employment contract also contained a clause requiring her to refrain from misusing or disclosing confidential information of the company, either before or after termination of her employment.
Employment restraint removed when new employment agreement drafted
The employee informed the general manager of the company that she wanted to set up her own business. During that discussion, she mentioned the restraint of trade clause in her contract and the fact that she would not be able to start up her own business for six months because of that provision.
The general manager understood that the employee would be selling school uniforms in competition with the company. Nevertheless, he authorised replacing her original employment contract with a new agreement, which instead contained a more limited “non-competition” clause that prevented her from “canvassing, soliciting or inducing customers and suppliers not to continue their relationship with [the company]”.
Employee begins to set up own business while still employed by company
However, the general manager later became aware that prior to any discussion of her resignation and while she was still employed by the company, the employee had already started setting up her own business and seeking to attract customers.
It also emerged that as part of these preparations, the employee had copied for her own use confidential information belonging to the company, including “DST files” for some schools and other educational institutions. (A DST file is a computer program used by a computerised embroidery machine to embroider the logo and other details onto a school uniform.)
The company took the view that the second employment contract should be regarded as void because of the employee’s conduct and bad faith.
It was up to the court to decide whether the employment restraint in her original employment contract should be enforced.