Like many legal agreements, employment contracts may be drafted in a way that is “unbalanced”, to favour one party. Generally speaking, the employer being in a position of power is able to dictate the terms of the agreement between the parties.
However, it is not commonly known that some employment contract provisions are either difficult to enforce or completely unenforceable. This article provides some examples of potentially unenforceable employment contract provisions and explains what you can do to protect your business interests.
- Restraint of Trade Clauses
Employers will commonly have circumstances where a past employee has confidential information regarding their business, is employed by a competing business or creates their own competing business. In these circumstances an employer may seek to rely on a restraint of trade clause (i.e. a clause which prevents an employee from working for or conducting a competing business within a specified location for a particular period of time).
Confidential information such as client lists and industry specific know-how can be very important information for a business to protect from spreading to rival businesses.
What may be unknown to many employers is that restraint of trade clauses are, generally speaking, unenforceable, unless they are in the reasonable interests of the parties and the public generally.
Whilst restrictions may be placed on employees who have confidential information and/or direct contact with customers, a restriction on the employee’s ability to work for a different business or to prevent competition from a competing business will not be enforceable.
Tips moving forward:
- Do not assume that a restraint of trade clause can be relied upon unless you have received professional advice prior to the employer/employee relationship being created;
- Ensure a “cascade” clause is inserted in the restraint of trade clause with reasonable restraint periods and distances to give your business a better chance of relying on the restraint clause;
- A restraint of trade clause is, generally speaking, more likely to be enforceable depending on circumstances such as:
- Whether the employer has a legitimate interest to protect;
- The area and time for the restraint;
- The effect the employee leaving has on the employer’s business; and
- The nature of the employee’s role means that they hold particular information or influence.
- Even where a restraint of trade clause is enforceable it can be costly to enforce;
- Include confidentiality clauses in your employment contract which survive termination of the agreement so that there are alternative avenues for protection of confidential information than a restraint of trade clause.
- Employee to Reimburse Employer for Training or Equipment
It can be very frustrating for employers to purchase equipment for an employee or have employees attend expensive training sessions at the employer’s cost, only to move business or create a competing business.
It is increasingly common for employment contracts to provide that an employee is required to reimburse an employer for training or expensive equipment, particularly where the employee discontinues employment within a certain time after completing the training or receiving the equipment.
However, section 326(1) of the Fair Work Act 2009 (Cth) essentially provides that a term requiring an employee to make a payment to the employer or another person must be “reasonable” in the circumstances to be valid.
Although employers may see reimbursement for such expenses as “reasonable”; the law has historically favoured employees in this regard.
A reimbursement for equipment or training is more likely to be considered “reasonable” where:
- The employee benefits wholly or substantially from the equipment or training, compared to the employer;
- The reimbursement amount is reasonable;
- The value of the benefit of the equipment/training to the employee is high; and
- The ability of the employee to decide whether they receive the equipment or training.
In addition, according to section 324 of the Fair Work Act the employer is required to meet further requirements when deducting an amount from monies payable to an employee as opposed to an arrangement where the employee must pay money to the employer.
An example of a permitted deduction would be a salary sacrifice arrangement (provided that other legal requirements are adhered to), whereby the employee forgoes a portion of their pay to receive a particular benefit.
Specifically, the Employer is only able to make a deduction from monies payable to an employee if one of the following applies:
- The deduction is authorised in writing by the employee and is principally for the employee’s benefit; or
- The deduction is authorised by the employee in accordance with an enterprise agreement; or
- The deduction is authorised by or under a modern award or an Fair Work Commission order; or
- The deduction is authorised by or under a law or an order of a court.
Furthermore, where the deduction is authorised by an employee in writing, the authorisation must specify the amount of the deduction and may be withdrawn or varied in writing by the employee at any time.
Tips moving forward:
- Ensure that you check any Modern Award, EBA etc. for provisions regarding who is responsible for the payment of training and equipment;
- Don’t assume that you are entitled to be reimbursed under an employment contract for training and/or equipment if your employee leaves your business;
- If you have specific equipment or training for which you wish to make an employee responsible, ensure you seek professional advice, preferably prior to executing any employment contract;
- Ensure that the deduction is permitted under the Fair Work Act;
- If a deduction is permitted under the Fair Work Act, ensure that the formal processes are followed, such as specifying the amount of the deduction in writing if the employee is authorising the deduction.
It can be costly to assume that all employment contract provisions can be relied upon and enforced.
We recommend that you contact us for advice regarding drafting and implementing employment contracts to give you the best chance of enforcing your contractual rights.