You may have heard about the recent uproar surrounding the “ten-million-follower food blogger ‘Lang Weixian’ going solo.” NS Legal has put together a summary of the whole incident:

After the food account “Lang Weixian,” which had 30 million followers, went silent for a month, three videos were released in quick succession and rocketed to the top of the trending list. You Xu, the founder of the “Lang Weixian” IP, revealed that Lang Weixian himself had crossed the bridge and burned it, setting up his own operation. In a statement, You Xu said that back in 2018 he discovered Lang Weixian in a competition and signed him as a company talent. Through the team’s combined efforts, the account gained 12 million followers in just six months. By 2020 the account pivoted to livestreaming, and Lang Weixian went from being a signed talent to You Xu’s business partner, taking 70% of the livestream net profits.

In July 2021, after the person in charge of livestreaming left the team, Lang Weixian himself recommended a “Ms. Lan” to take over the livestreaming work. Unexpectedly, six months later this Ms. Lan left with Lang Weixian and some of the staff and set up her own operation. She also took the company’s filming equipment and wiped all of the company’s hard drives. With little choice, You Xu signed termination agreements and non-compete clauses with the relevant employees and paid out their salaries. But not long after, You Xu discovered that these employees had appeared in videos on Lang Weixian’s new account. Looking deeper, it turned out that Ms. Lan had already set up a new company while still employed, had quietly transferred the business resources to this new company, and had launched a competing business of the same type.

Setting aside who was right and who was wrong, the legal issues raised by this incident are well worth discussing. If the same situation had occurred in Australia, things would get interesting. Australian employees have a whole set of statutory employment-related rights and obligations — and generally speaking, Australian employment and labour law protects employees. On top of that, Australian employees have a giant backstop in Fair Work, which gives their rights serious protection. In Australia, the boss is not God — one slip and you may breach employment law and get taken to court by an employee.

So in a “Lang Weixian”-style situation, where a departing employee takes company trade secrets and client resources with them, what should an employer do?

The “restraint of trade clause” that protects employers

In a fiercely competitive market, employers are typically worried that employees will take client resources with them when they leave, or use the company’s existing resources at another business to compete with their former employer. So employers will usually include a “restraint of trade clause” in the employment agreement. Clauses like this exist to protect the employer’s interests.

So what is a “restraint of trade clause”?

In an employment agreement, the employer will typically use restrictions to stop the employee from using the former company’s trade secrets and client resources to compete with it after leaving. Common restraints include:

1. Non-solicitation clause: prohibits the employee, upon departure, from poaching the company’s clients or staff, from accepting work offered by clients, or from introducing other company employees to work for clients;

2. Non-compete clause: prohibits the employee from directly or indirectly engaging in a business similar to the company’s, in a way that competes with the company;

3. Confidentiality clause: prohibits the employee from using or disclosing the company’s trade secrets after leaving.

If a “restraint of trade clause” is signed, can the employer rest easy?

Not necessarily.

The employer must show that the clause is reasonable and does not harm the public interest. In disputes between an employee and an employer over a departure, the court will look at whether the clause is necessary, typically considering several factors:

Pre-contract conduct

Nature of the work

Scope of the restraint (generally, the longer the restricted period and the wider the geographic scope, the less reasonable it becomes)

If the restraint goes beyond what is reasonably necessary for the company to protect itself, the court will not uphold it.

Take the following case as an example:

Just Group is a well-known Australian retailer, whose sub-brands include Just Jeans, Jay Jays, Jacqui E, Portmans, Dotti, Peter Alexander and others. In 2016, Just Group hired Ms. Peck as its Chief Financial Officer. Her employment agreement contained a restraint clause prohibiting her from engaging in “any activity” that was “the same as or similar to” her current employer’s for two years after termination with Just Group. The restraint clause expressly prohibited Ms. Peck from working for up to 50 brands, for a period of up to 24 months.

In June of the same year, Ms. Peck accepted a position as Finance General Manager at another fashion retailer, Cotton On, and subsequently gave notice to Just Group. Just Group then took her to court.

The court found that Just Group’s restraint of trade clause was too broad and unreasonable. Prohibiting “any activity” that was “the same as or similar to” her current employer’s went beyond the scope of protection that was necessary. It would also have barred the employee from working at businesses that were not in competition with Just Group at all — for example, a Woolworths supermarket. Finally, the court considered the duration of the restraint to be too long and unreasonable.

Final thoughts

When you are employed, or employing staff, in Australia, it is important to be clear about your rights and obligations under employment law. Employees are protected by employment law, but they should also be clear about their own obligations. Employers, while meeting their duties as business owners, also need to understand how to properly protect their own interests and avoid damage to the company.